Residential Property Finance

The general economic slowdown in Germany at the beginning of 2025 was worsened by various uncertainties, particularly the actions taken by the United States in the form of protectionist trade policies. Nevertheless, the economic forecast is becoming more optimistic: leading economic research institutes have raised their GDP growth projection for 2025 from 0.1% to 0.3%. Growth resulted from private consumption, which benefited from rising real incomes and a declining savings rate. Exports also rose noticeably, driven by preemptive effects ahead of newly expected U.S. tariffs. Thanks to fiscal stimulus and low interest rates, investment activity is picking up, as reflected in increasing order volumes, transactions, and building permits. The labor market has so far remained largely stable, although the unemployment rate has increased due to the general weakness in the economy.

At the beginning of 2025, interest rates for residential mortgage loans have continued to decline compared to early 2024: The average effective interest rate currently stands between 3.5% and 3.6% per annum. As a result, the construction or purchase of residential property has become easier to plan — an advantage further enhanced by rising new contract rents due to ongoing excess demand. Developments in the real estate market are also reflected in the financing activities of the vdp member institutions. After a first recovery in 2024, the upward trend in the lending of residential real estate mortgage loans strengthened noticeably at the beginning of 2025. In the first quarter of 2025, loan commitments for residential real estate amounted to EUR 24.4 billion—an increase of approximately 32% compared to the same quarter of the previous year. While demand for financing of owner-occupied housing had already picked up in 2024, a clear recovery is now also evident in the rental housing segment. Due to stable returns, this segment is becoming more attractive than other investment options.

Source: vdp based on information provided by vdp member banks