House price rises are spreading beyond the hot markets of Auckland and Canterbury and are likely to continue this year because of extremely low mortgage rates, some economists say.
But home buyers can expect lending rates to rise significantly in the next two to three years, from about 6 per cent towards a "painful" 8 per cent or even 9 per cent, eventually flattening out price rises.
Economists say official interest rates could start rising as soon as September this year or by early 2014, gradually rising from 2.5 per cent to 4.5 per cent or as much as 5.5 per cent over time.
As widely expected, Reserve Bank Governor Graeme Wheeler held the official cash rate at 2.5 per cent yesterday, but fired a warning shot at rising house prices and said the currency was overvalued. On some measures house prices would be as much as 20 per cent overvalued, economists said.
Wheeler pointed out that house price inflation had increased, and said the central bank was keeping a close eye on that. House prices rose 6.7 per cent last year, according to the Real Estate Institute's Housing Price Index.
The central bank is also keeping a watch on household credit growth. Figures out late yesterday showed household borrowing rose 1.2 per cent in the December quarter, the strongest quarterly rise since mid-2008. Net mortgage debt in December was up 3.7 per cent from a year before, a clear acceleration from earlier last year.
"The bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply," Wheeler said.
Westpac chief economist Dominick Stephens expected official interest rates to start rising in December this year, but rise more than others currently expected, from 2.5 per cent to 5.5 per cent by mid-2016.
"Today's fixed rates are low relative to where we think floating rates are going to go," Stephens said.
The housing market kicked off in Auckland and Canterbury because of a shortage of supply, but was now being driven by low interest rates, he said.
"Our concern is that interest rates may need to go up a fair way to check the inflation pressures arising from the Canterbury rebuild.
"If they do, that could be very painful for some people getting into the housing market now."
House prices were overvalued by as much as 20 per cent, assuming interest rates moved back to more normal levels. But with mortgage rates as low as they are now, "house prices could go higher still over the next two years", he said.
"It is now becoming a nation-wide upturn [in prices]," Stephens said.
Westpac is forecasting house prices to rise 9 per cent this year or more, and 4 per cent next year, but then be flat to falling as higher mortgage rates kicked in. House sales volumes were rising rapidly across the board and house prices could follow them up soon.
"The further they [house prices] go up now, the greater the risk of a correction [fall] because of those higher interest rates," he said. There could be a painful combination of rising interest rates and falling prices, as seen in 2007.
Bank of New Zealand head of research Stephen Toplis said if the economy grew at a modest pace this year, the "new normal" interest rate would rise to 4.5 per cent.
BNZ expected rates to start rising in December, and gradually tick up.
Toplis agreed house prices were probably 20 per cent overvalued when compared with wages, rent returns or market averages.
But in the current environment house prices were likely to keep rising at recent levels of 5 to 7 per cent at least for the next year.