Goodbye to low mortgages next year

By JAMES WEIR - BusinessDay

Floating mortgage rates could jump as soon as April next year, rising to more than 7 per cent in a few months as the Reserve Bank starts to lift official rates, according to some economists.

Others say the Reserve Bank will move "late and hard" from September next year, lifting rates fast and in big bites from 2.5 per cent to 5 per cent or more, pushing up floating rates.

With longer term lending rates already rising and forecasts for higher unemployment, house prices are expected to flatten out after their recent bounce.

The Reserve Bank held official interest rates steady yesterday at 2.5 per cent and reiterated that rates would remain low until the "second half" of 2010.

Some bank economists expected the central bank to start lifting rates by April despite market pricing earlier in the week suggesting a strong chance of a rise as soon as January.

After the Reserve Bank's statement, the kiwi dived to US71.74c yesterday, down from US75c two days earlier.

However, some economists still expect the currency to move up toward US80c over time, as the US dollar weakens further.

ANZ National said it expected the Reserve Bank would move rates from 2.5 per cent to about 5 per cent, starting from September. The Reserve Bank would wait for other central banks around the world to lift their rates first, which would be a sign of confidence about the global recovery.

ANZ National Bank chief economist Cameron Bagrie said most people were borrowing on floating rates or fixed rates of six months to a year because of the much higher cost of a longer term fixed rate.

The Reserve Bank would be comfortable with that trend because when it did finally start to lift rates, "they will get a lot of bang for their buck".

Borrowers were better off being on shorter rates, although they might be grumpy when rates rise later next year.

Mr Bagrie said financial markets had been overly optimistic about a rapid economic recovery.

The recent rebound in house prices was a "dead cat bounce" and masked weakness behind the scenes with rising unemployment and already rising fixed interest rates. House prices were likely to be flat in the next year and land prices were likely to fall.

ASB Bank said if the Reserve Bank got confirmation that the economy was recovering, rates would jump from 2.5 per cent to 4 per cent in three moves, starting in April. That was likely to push up floating rates 150 basis points, from 5.7 per cent to more than 7 per cent.

ASB Bank economist Jane Turner expected the Reserve Bank to lift rates in April, rather the second half of the year because of the pick-up in domestic demand, especially in the housing market.

"The best way to slow the housing market is to raise interest rates," she said.

RESERVE BANK'S VIEW

* Official cash rate held at 2.5 per cent until the second half of 2010.
* Inflation "comfortably within the target range over the medium term".
* Housing market has partly recovered from price falls.
* Signs of a gradual lift in household spending.
* Government spending is supporting activity.
* But business spending is weak and credit growth is low.