Rising rates set to bite floating mortgages faster

TOM PULLAR-STRECKER
Last updated 05:00 19/02/2014

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A "party vibe" created by the strengthening economy could see floating mortgage rates hit 8 per cent in 2015, says Kiwibank senior economist Donna Purdue.

In a "state of the nation" address, Purdue forecast economic growth could peak at 4.5 per cent this year. Surveys showed business and consumer confidence was strong and companies' "intention to employ" at its highest level for 20 years, she said.

Five quarters of falling unemployment had so far failed to feed through into wages, but she expected that would change within the next six months, which would in turn trigger inflation and send interest rates on an upward grind. "We know historically the lag can be seven quarters."

Purdue forecast the Reserve Bank would raise interest rates by 0.25 per cent at its next review on March 13. Rates would climb 1.25 per cent this year and a further 1 per cent in 2015, Kiwibank believed.

The increases would bite more quickly than during the last rising cycle during the mid-2000s because the proportion of mortgage borrowers on floating rate or six-month terms had risen from 50 per cent to 70 per cent and the average ratio of household debt to net disposable income had crept up from 140 per cent to 148 per cent, she said.

That meant the Reserve Bank would get "more bang for its buck".

However, Purdue forecast the dampening effect on house prices would be offset by continuing strong net migration and rising income levels. Kiwibank was not expecting a fall in house prices but rather that price growth would slow gradually, she said.

The bank's forecast was based on an assumption New Zealand would attract 30,000 net migrants this year, she said.

Most of the "risks" to Kiwibank's forecast were on the upside, but growth could conceivably be disrupted by bad debt in the Chinese financial system.

"Our central view is that the global recovery will muddle along," she said.

Headline inflation had been held at bay during the global economic downturn by the relative strength of the New Zealand dollar, which had masked the rising price of "non-tradeable" locally-produced products and services. But the Reserve Bank had perhaps shifted from underestimating the likely strength of the kiwi, to overestimating it, she said. Fairfax NZ

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