Floating rates tipped to jump

JAMES WEIR
Last updated 05:00 13/12/2013

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The Reserve Bank's gun is loaded and it will fire off the first shots of higher interest rates probably by March, economists say.

Borrowers can expect floating rates to jump from under 6 per cent now to about 8 per cent in a couple of years, taking a big bite out of household budgets. And if the economy grows even faster than the Reserve Bank expects, rates could head close to 9 per cent, some economists say.

Yesterday the Reserve Bank held the official cash rate at 2.5 per cent, but warned that it could rise by 2.25 per cent over the next two and a bit years, taking the cash rate to 4.75 per cent.

Rather than riding floating rates up, borrowers may be better off spreading their risks by borrowing some of their loan on one-year fixed rates, with some rates now under 5 per cent.

But the good news is that the economy is expected to boom in the next year or so, with a strong job market, rising wages and unemployment heading down to less than 5 per cent by early 2016, according to Reserve Bank forecasts.

Rising interest rates will also be good for depositors with money in the bank who have seen some term deposit rates more than halve in the past five years to just 4 per cent or so.

The combination of looming interest rate rises and the recently imposed speed limits on low deposit home loans is also likely to see house prices cool in the next year, but probably not go off the boil in cities where there is high demand, such as Auckland and Christchurch.

Figures out yesterday showed national median house prices in November were $425,000, up almost 11 per cent on a year ago.

But in a clear sign the lending limits are hitting home, sales volumes were down about 7 per cent, to their lowest levels in five months. Typically house sales volumes rise three to six months before prices go up and drop before price cool down.

With fewer first-home buyers able to get a loan, the median house price has probably risen because fewer cheaper homes have been sold, taking the average up.

Bank of New Zealand chief economist Tony Alexander said that nobody had correctly forecast interest rates in the past five years, and there was no reason to think that would change in the future.

So people should not try to make borrowing bets, based on a particular forecast for interest rates because it was so hard to pick.

"Basically just spread your risks. Have some debt floating - it is nice and cheap, and have some in the six to 18 months fixed as well," he said. "If you can spare the coin, maybe lock in some on a three-year rate as well, because you could easily get quite a hike in interest rates further out."

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Despite higher interest rates, Mr Alexander still expected house prices to keep rising, because of a strong job market, with unemployment dropping and wages rising. The economy would probably grow more than 4 per cent next year.

And record net migration would also support the housing market, with a shortage of homes in Auckland and Christchurch.

Infometrics managing director Gareth Kiernan said it expected stronger economic growth to carry on for longer than the Reserve Bank.

That suggested the OCR would rise to about 5.25 per cent, taking floating mortgage interest rates up towards 9 per cent.

"Our models suggest that being fixed for one year has been the best bet for most of this year (at about 5 per cent)," he said.

That was still attractive compared with a two-year rate of about 5.6 per cent or so.

- BusinessDay

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