Higher interest rates stall German home prices while rents keep climbing

According to research from the Institute of the German Economy (IW) in Cologne, the surge in interest rates is curbing demand for residential properties, resulting in purchase prices that have essentially plateaued since 2023. The authors, Pekka Sagner and Michael Voigtländer, attribute this stagnation to higher financing costs, rising inflation expectations, and doubts about sovereign debt sustainability abroad. New-construction activity is projected to fall further as building costs, largely driven by high energy prices, rise.

Household loan repayments have risen noticeably, increasing the monthly burden for borrowers. Rental markets, however, are experiencing notable growth, especially in larger cities, and the IW sees no near-term relief. The study warns that continued cost pressures could exacerbate the housing shortage and keep rents on an upward trajectory.