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European Central Bank building, Frankfurt
The European Central Bank did on 10th September what almost everyone expected it to do. Meeting in Berlin rather than at its usual Frankfurt headquarters, it raised its three key interest rates by 25 basis points, taking the deposit rate to 2.50%, the main refinancing rate to 2.65% and the marginal lending rate to 2.90%.
It was the second increase this year, following the ECB's return to tightening in June. Christine Lagarde, the ECB's president, called the decision a "no-brainer". For property investors, however, the increase itself was the easy part to understand. The harder question is whether it represents another isolated response to an energy shock or the beginning of something more lasting.
The case for acting is straightforward. Eurozone inflation reached 3.3% in August, up from 2.9% in July, driven overwhelmingly by energy prices following the escalation of the Iran war and effective closure of the Strait of Hormuz. Brent crude has traded above $100 a barrel for the first time since July, while European natural-gas prices have returned to levels not seen since 2023.
The ECB now expects inflation to average 3% in 2026, easing only to 2.5% in 2027 and 2.1% in 2028, remaining above target throughout the forecast period. Economic growth, meanwhile, has proved more resilient than anticipated. The forecast for this year was raised to 0.9%, leaving the central bank somewhat more confident that the economy can withstand dearer money.
What happens next is the real question
The increase was priced in. What markets had not fully settled was what would follow. Derivatives now price in another rise by year-end, according to the Wall Street Journal, whereas many investors had previously expected the ECB to be approaching another pause.
There is no unanimity about that. Maximilian Radert of Kingstone Investment Management expects the September move to conclude the current tightening sequence, at least for now. Core and services inflation remain comparatively moderate, wage pressure is easing and employment growth is weakening. Further increases would bear more heavily upon investment and growth, while adding to the fiscal pressure faced by heavily indebted governments.
Comments from within the ECB since the meeting nevertheless tilt the balance towards further action. Chief economist Philip Lane expects inflation to reach at least 3.6% by year-end and described September’s increase as a “measured adjustment to a significant inflation issue”. Austrian central bank governor Martin Kocher told the Financial Times that another rise could be required if oil remains around $100 a barrel until the end of the year. Under the ECB’s adverse scenario, with oil averaging $99 and gas €77 per MWh in the fourth quarter, inflation would reach 3.2% in 2027.
The complication is that this inflation was not principally created by excessive domestic demand. Kocher acknowledges that Europeans may have to tolerate somewhat higher inflation in the short term, while IREBS professor Steffen Sebastian points out that higher rates will not produce more oil or reopen a blocked shipping route. Neither sees clear evidence yet of higher energy costs spreading decisively into wages and other prices, although Kocher warns that the danger increases the longer the disruption continues. September’s decision may have been a no-brainer. The next one probably will not be.
The financing costs that matter had already risen
For the property market, the distinction is important. The additional 25 basis points will feed relatively directly into floating-rate loans and Euribor-linked development facilities. But most acquisition finance, fixed-rate refinancing and property valuation are influenced more heavily by longer-term swap rates, government bond yields and lenders' risk margins. Those had already been rising before the ECB met.
Francesco Fedele, chief executive of BF.direkt, points to the ten-year swap rate, which has trended upward since 2024 and surrendered the relief seen briefly after the earlier Iran ceasefire. His advice is unexciting but urgent: prepare refinancings early and stop planning around a meaningful decline in rates.
This is where a widely anticipated central-bank decision becomes more troublesome than it first appears. Higher financing costs are landing upon property values that have already fallen, reducing the amount of debt an asset can support and forcing owners to contribute additional equity. Torsten Hollstein of CR Investment Management warns that this will make negotiations between borrowers and lenders still more difficult, particularly where a maturing loan was written against a valuation and leverage level inherited from the previous market.
Property is also being squeezed from both sides. The energy shock raises the cost of operating, constructing and refurbishing buildings; the monetary response raises the cost of financing them. An office owner planning an energy retrofit or a developer trying to make a residential scheme viable therefore encounters both the illness and part of the medicine.
The evidence is already on the insolvency register
The consequences are already visible, although interest rates were never the sole cause. Germany completed 206,600 homes in 2025, the lowest number since 2012, while the Bauherren-Schutzbund counted 1,230 developer and project-developer insolvencies between 2023 and 2025. Prominent developers Pandion AG and 12.18. Investment Management joined that list in August. Between January and May this year, construction recorded 44 insolvencies per 10,000 businesses, compared with 29.8 across the wider economy.
Expensive land purchases, higher building costs, weaker demand, strategic mistakes and poor liquidity management all contributed to individual failures. But the change in financing conditions exposed projects and corporate structures that could survive only while funding remained cheap, valuations high and refinancing readily available.
Hollstein makes a point the industry remains reluctant to hear. Today's interest rates are not unusually high by historical standards; the anomaly was the decade of negligible and sometimes negative rates that preceded them. Yet many capital structures, development calculations and investment strategies were assembled during precisely that period. Something does not have to be historically abnormal to be extremely uncomfortable for a business built upon the assumption that it would never happen.
The September increase will not restart Germany's property crisis, nor does it mean every transaction or development must stop. Banks are lending, capital remains available and strong sponsors with viable assets can still obtain finance. But the recovery will become narrower and more discriminating if the anticipated relief from falling rates continues to recede.
REFIRE: What should unsettle investors is not September's quarter-point increase, but the disappearance of another assumption upon which the property recovery was being built: that financing costs would soon begin falling again. Whether the ECB raises rates further remains uncertain, but waiting for cheap money to return is no longer a credible business plan. The sector spent a decade treating near-zero rates as normal. It now must treat their absence the same way.