Squeezed in the middle?

01 / 09 / 22 - 4 minute read

Booms and busts in residential real estate have been historically linked to deep recessions and financial crises, especially when the boom is fuelled by debt. Marcus Cieleback, Chief Urban Economist at PATRIZIA, examines the risks in a time of increasing interest and inflation rates?

From the 1980s onwards, inflation in the rich world generally fell and became less volatile. In the decade after the global financial crisis, low interest rates prevailed. These two factors were responsible for creating a benign environment for investi

Tale of two submarkets

There are two submarkets with diverging dynamics based on current interest and inflation rates: the rental and the for-sale markets. The latter can be subdivided into owner-occupiers, private investors and professional/institutional investors. Depending on which submarket is examined, the demand side effects will be different, even contrarian. In contrast, the supply side effects across submarkets are similar.

Record high inflation and the sharp increase in capital market interest rates – which have caused mortgage rates to rise – mean less demand for new homes as first-time buyers need to spend more of their monthly income on a mortgage. At the same time, the effect on owners with a mortgage depends on their mortgage type.

Long-term fixed-rate mortgages shield buyers from interest rate movements during the fixed period. Consequently, markets dominated by such loans, like Belgium, Denmark, Germany and the Netherlands, will only see an impact in the for-sale market for first-time buyers. Existing owners with a mortgage will only be impacted if they refinance.

Markets where adjustable-rate mortgages dominate, such as Finland or Poland, could see house prices decline as monthly payments will also rise for owners with a mortgage. But the Polish government has already introduced a mortgage moratorium, indicating that intervention is likely to limit price effects caused by rising rates on owner occupiers with a mortgage.

Varying impact of interest rates

Data from the European Central Bank shows interest rates for housing loans have varied significantly at the country level during the past 12 to 18 months. In markets like Belgium, France, Ireland and Spain, home loan interest rates only increased by 10 to 30 basis points during the first six months of 2022.

In Germany, home loan interest rates increased by about 90 basis points. Consequently, the challenges for first-time buyers in the former countries are limited, while in Germany, more and more households will struggle to put their foot on the housing ladder’s rungs.

As a consequence, the risks from rising rates mainly relate to first-time buyers not being able to afford a mortgage. A large part of ‘crowded out’ first-time buyers will remain in the rental market, increasing demand for rental units, with the corresponding rental impact, as they generally belong to households with above-average incomes.

Impact on buy-to-let

As mortgage costs rise, the demand for buy-to-let will generally decline. As some institutional investors, especially in the residential sector, are 100% equity buyers, the institutional sector will react less sensitively to interest rate increases. This means the price dynamic will decrease significantly, like what is expected in most for-sale markets with a long-term interest rate fixing structure.

Consequently, there will be a strong deceleration of capital growth in 2022 and 2023. In addition, there is the possibility of negative growth in 2022 in some markets and/or quality types, which are no longer in demand from the institutional side, often due to rising ESG concerns.

Inflation, even if short-lived, will also have an impact because wage growth lags inflation, leading to a decline in households' purchasing power. On the for-sale market, the effect will be like a rise in mortgage costs, with its corresponding impact on house prices. An increase in demand will be noticeable in the rental market as well, but this will be more broad based and budget constrained, as it impacts all households.

For private and institutional investors, the pure inflation effect will be minimal. The underlying calculations will likely not show significant pricing effects as most investors link their rental contracts to inflation (indexation), which helps them deal with the rising costs.

Supply-side effects

While demand-side effects are complex and even contrarian depending on the submarkets compared, the supply-side effects are more concurrent. Developers face higher financing costs at a time when raw material prices and prices for preliminary products are rising.

Consequently, projects are being postponed, downsized or scraped. This is happening in the for-sale market as well as in the rental market. Looking at the change of the forecasts during the first half of 2022 of expected completions between 2022 and 2024, a wide variation can be observed throughout Europe, but the trend is clear to lower completions.

A decline in demand in the for-sale market will be met by less supply and less supply growth, which will stabilise the overall market. In the rental market, rising demand will be met by declining supply, exacerbating the existing imbalance between supply and demand.


Looking from the perspective of an institutional investor in multifamily housing, one should not be frightened by rising interest rates and higher inflation. While this negatively impacts financing conditions with corresponding effects on leverage, the market fundamentals of the rental market are supported as more households look to rent.  

Overall, the attractiveness of the rental market in Europe for long-term investors, looking for diversification and stable income streams, will not be negatively impacted. The development of net operating income will again prove the sector’s resilience.

However, this does not mean short-term price effects can be ruled out, but they are likely to be temporary for well-located, good-quality institutional assets. Data for Germany shows that capital value developments and rental growth are strongly correlated over time for multifamily assets.

A decline in demand in the for-sale market will be met by less supply and less supply growth, which will stabilise the overall market. In the rental market, rising demand will be met by declining supply, exacerbating the existing imbalance between supply and demand.

Markus Cieleback

Augsburg, Germany

Dr. Marcus Cieleback

Chief Urban Economist

Dr. Marcus Cieleback


Marcus Cieleback has been with the Research department of PATRIZIA since 2008, currently as its Chief Urban Economist. His focus includes the development of PATRIZIA’S house view and its implementation within investment strategies. Within these analyses special focus is given to the institutional framework of markets, especially in the residential sector, as it provides the “rules of the game” and crucially influences city level developments and hence the return perspectives.