Between Interest Rate Cuts and Risk Premia: Current Trends in Europe’s Real Estate Markets
Published: November 20, 2025
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Eurozone countries are navigating two contrasting dynamics: on the one hand, the reduction and subsequent stabilization of the ECB policy rate at 2.0%; on the other, rising long-term bond yields driven by high public spending, growing debt levels, and political uncertainty. This article examines how real estate markets have evolved in this environment and what the outlook holds.
ECB monetary policy in standstill
Between June 2024 and June 2025 the ECB implemented several rate cuts (totaling eight cuts in the easing cycle) which brought the policy rate (deposit facility rate) from 4% to 2% as of 11 June 2025. Since that time, the rate has been held unchanged – including at the meeting of 30 October – marking the third consecutive hold.
The decision reflects a backdrop of inflation in the euro area that is approaching the ECB’s 2% target and a moderate growth outlook (around 1% real GDP growth for 2026). With inflation no longer rapidly accelerating, and growth remaining positive (though subdued), the ECB appears to judge that further immediate rate adjustments are not required at the moment. In real terms (i.e. in this case adjusted for the one-year-ahead expected eurozone inflation) the policy rate is near zero—accommodative, though still above its 20-year average (-1.1%).
Sovereign bond yields on the rise
Sovereign bond yields have risen across many European countries in recent months, reflecting growing public debt levels and expectations of further increases linked to expanding defense spending in the coming years.
After standing near 2.1% in December 2024, the yield on Germany’s 10-year government bond showed some swings through 2025 — rising early in the year, dipping mid-year, and firming again to around 2.7% by November. This upward trend was reinforced by the government’s announcement — in March 2025 — of a €500 billion special fund for infrastructure, climate-neutrality and defense investment.
In France, political uncertainty remains exceptionally high. The government faces constant threat of a no-confidence vote amid tense budget negotiations for 2026. The country’s debt-to-GDP ratio has surged from 98% before the pandemic to 116% in Q2 2025 and is expected to move toward 120 % in coming years.
Persistent public deficits, weak growth and high interest-cost burdens complicate efforts to stabilize and reduce the debt. At the same time, the absence of a stable parliamentary majority – and the limited tradition of coalition governments cooperating in France compared with Germany – is making the implementation of tough fiscal reforms increasingly challenging.
Reflecting these concerns, Fitch Ratings downgraded France’s long-term sovereign rating from AA- to A+ on 12 September 2025, while S&P Global Ratings followed with a similar downgrade from AA- to A+ on 17 October 2025. Moody’s maintained its rating at Aa3 but revised the outlook to negative on 24 October 2025.
As a result, yields on French 10-year government bonds have moved to elevated levels and are anticipated to remain so in the short term. The spread between French and German 10-year yields has widened to around 80 basis points, indicating the higher risk premium currently associated with French sovereign debt.
Lending rates for house purchase
Banks generally set their lending rates on the basis of their short-term funding costs (which are closely linked to the ECB’s policy rate), their long-term refinancing costs (which are influenced by 10-year sovereign bond yields) as well as inflation expectations and borrower-specific risk.
In Germany, mortgage rates for house purchases peaked at 4.2% at the end-2023. Subsequent monetary easing reduced banks’ refinancing costs, allowing mortgage rates to fall. However, in recent months they have edged up again, reflecting higher long-term bond yields.
In France, mortgage rates declined during 2024 in line with lower inflation and monetary-policy rates, but have then stabilized around 3% since March 2025. Although the ECB did two further rate cuts in April and June 2025, French mortgage rates have so far not moved significantly lower because long-term financing costs (i.e., sovereign bond yields) are rising at the same time.
Interestingly, French mortgage rates remain somewhat below German levels despite higher French sovereign bond yields. Several factors may contribute: inflation expectations are lower in France (1.5% in France vs. 2.2% in Germany for 2026), there is an intense competition among French banks, and standard maturities are shorter (30 years loans are common in Germany, whereas the maximal length is usually 25 years in France).
In France, the recent increase in 10-year sovereign yields appears driven significantly by a rising sovereign risk premium — reflecting political and fiscal uncertainty — rather than by a sharp increase in banks’ short-term funding costs. French banks continue to rely on short-term wholesale funding (for example via Euribor-based markets) which remain comparatively more favorable than implied by long-dated sovereign yields.
Meanwhile, both France and Germany’s housing markets show early signs of improvement in 2025. In Germany, residential property prices rose by about 3.2% yearly in Q2 2025, signaling some renewed momentum. In France, transaction volumes are reported to have increased, and prices appear to have stabilized over the past year, although the recovery remains cautious. That said, in Germany the recent uptick in mortgage funding costs may act as a constraint on demand going forward.
Office prime yields:
Paris CBD – resilience amid turbulence
The Paris Central Business District (CBD) has shown remarkable resilience despite recent political and economic turbulence. The rise in prime yields in 2022–2023 mirrored the broader increase in policy rates and sovereign bond yields. Yet, real estate yields adjusted far less sharply: while French government bond yields rose by over 300 basis points between end-2021 and mid-2025, Paris CBD prime yields increased by only around 130 basis points.
Since early 2024, prime yields have stabilized at around 4.0%, while prime rents have continued to grow, indicating ongoing demand and strong investor confidence. As a result, the nominal spread between prime office yields and sovereign bond yields has narrowed to just 70 basis points, the tightest in a decade. The narrow spread reflects a rising risk premium on government debt, yet confidence in the city’s economic fundamentals and long-term prospects remains strong.
In La Défense, yields continued to rise throughout 2024, reaching 6.4% in the first half of 2025. Persistently high vacancy rates (15,4%) and limited job growth weigh on occupier demand, keeping willingness to pay under pressure.
German markets: sharper correction, emerging rebound
In the major German cities, prime office yields have decompressed more markedly than in Paris—up 210 basis points in Berlin and 190 in Munich since end-2021—despite a smaller increase in government bond yields (+280 bp). The German market has been hit harder by the interest rate hike of 2022–2023, leading to declining investment volumes and weak investor appetite. Market activity started to recover in the first half of 2025, with a noticeable increase in transaction volumes. However, vacancy and supply remain elevated, partly due to the release and absorption of new, high-quality office space, which in turn frees up older premises.
Outlook : stronger momentum in Germany
While Paris has demonstrated greater resilience, this also means that value corrections have been milder, leaving limited upside potential. Prices remain high, rent growth is likely to slow, and yield compression appears unlikely amid persistently elevated bond yields. As a result, Paris presents a stable but mature investment profile.
In La Défense, returns have become more attractive, yet risks remain elevated, particularly given the large stock of ageing office buildings requiring renovation. Nonetheless, the area retains long-term potential, supported by ongoing urban renewal, greening initiatives, as well as excellent transport connections—factors that could attract tenants seeking cost-effective alternatives to central Paris.
By contrast, Berlin and Munich may offer more favorable entry points. After significant price corrections, risk premiums in these markets stand well above their long-term averages. For long-term investors, this suggests renewed potential, provided investments are guided by selectivity and careful evaluation of local conditions.