Real estate: High interest rates depress purchase prices in major cities, rents rise

Frankfurt/Main. According to the German Economic Institute (IW), sharply increased loan interest rates are depressing real estate prices in major cities, while rents are rising sharply. In the third quarter, apartments in Germany's seven largest cities cost almost one percent less than a year earlier and houses cost 2.3 percent less, as a study by the IW shows. Prices fell particularly sharply in Stuttgart with 3.9 percent, Berlin with 2.0 percent and in Cologne with 1.3 percent.

Prices for residential property have stagnated across Germany. “This means that prices are a good ten percent below the peak of 2022,” wrote IW real estate economists Michael Voigtländer and Pekka Sagner.

With concerns about inflation and rising key interest rates, loan interest rates have risen sharply: According to data from the financing intermediary Interhyp, the average interest rate on ten-year real estate loans recently climbed to around 4.5 percent - the highest level since the 2009 financial crisis.

Households that take out real estate loans are feeling the impact of the rise in interest rates. With a sum of 300,000 euros and two percent repayment, they paid around 1,450 euros per month at the beginning of the year, the IW calculates. “Today it’s a good 1,600 euros – an increase of more than ten percent.”

Investors with a lot of equity also held back. With concerns about high debt levels in countries like France, government bonds are once again generating higher returns, meaning that real estate is becoming less attractive as an investment.

The study is based on apartment advertisements that come from the Value market database, an established information system for the housing industry. According to IW, the data is representative of the public housing market.

“Affluent households back on the rental market”

In contrast to purchase prices, upward pressure on rents has increased, the IW analyzes. Asking rents rose by 4.5 percent nationwide and by 5.2 percent in the metropolitan areas. In the metropolises, rents rose by 3.8 percent and are therefore below average - with the exception of Hamburg: According to IW, rents there rose by almost seven percent.

“High interest rates are driving wealthy households back to the rental market,” says IW expert Voigtländer. This increases demand without increasing supply. In addition, construction costs are rising because construction uses a lot of energy. Therefore, less construction is likely to take place, which will further drive up rents. "The state should take countermeasures, for example with guarantees for private real estate loans. This costs little and stabilizes the market."