Reciprocal signaling between metanephric mesenchyme (MM) and ureteric bud (UB) is essential for human kidney development. However, human pluripotent stem cell-derived kidney organoids do not incorporate UB differentiation, limiting organoid maturation and disease modeling. Here, a hypoxia-based differentiation method inspired by developmental cues is reported that produces mature kidney organoids with collecting duct-like tubules connected to multiple nephrons. Hypoxia promotes the co-induction of MM and UB-like progenitors within the same culture dish. The augmented expression of reciprocal signaling genes guides the differentiation of the kidney organoids into highly structured tubular networks, mature RNA profiles, and a more realistic micro-anatomy, leading to higher-order kidney organogenesis in vitro. These hypoxia-enhanced kidney organoids recapitulate the cystic phenotype in polycystic kidney disease, displaying efficient cyst formation across the entire tubular region and increased sensitivity to drugs. The findings provide an improved in vitro model for studying kidney development and disease mechanisms.