Mortgage Rates could rise quickly, economist warns

A leading bank economist is warning home buyers that current below-average fixed term mortgage rates could start rising "quite rapidly". Westpac senior economist Dominick Stephens said people had flocked to the value of low interest floating rates, in the wake of the global economic crisis and subsequent slow recovery.

But it would be prudent to keep a close eye on some key economic indicators in the short to medium term to see if floating rates still provided the best value, he said.

Consumers preferring a floating rate now might find they ended up paying more over the next two years or so than if they took a fixed rate, Stephens said.

Fixed term rates represented good value now as consumers were able to lock in below-average mortgage rates for a long period, but the fixed rates could rise earlier and faster than floating rates if the economy performed better than expected this year.

Westpac expected the Reserve Bank's expectation of subdued growth during the next 12 months would be exceeded.

Stephens said the Reserve Bank might have to raise the official cash rate earlier than the end of 2011, which was its plan for now.

Consumers should keep an eye on four key factors.

Those were whether the housing market stabilised sooner than the Reserve Bank anticipated, the economic impact of the Rugby World Cup, earthquake reconstruction activity in Christchurch, and high commodity prices for farmers.

The Reserve Bank and Westpac had contrary views on whether farmers would spend the cash or use it to reduce debt, Stephens said.

The housing market, particularly in Auckland, was already showing some signs of stabilising.

If maintained, pressure would go on the Reserve Bank's prediction of a 2 per cent decline in house prices in the first half of 2011.

Farmgate returns would be excellent, and while the Reserve Bank expected farmers to use the cash to pay down debt, Stephens believed farmers would spend more freely than in 2010 although they would not return to the heady spending of last decade.

Coupled with the rebuilding of Christchurch and the Rugby World Cup's predicted $1.15 billion in total economic activity, fixed rates could rise earlier and faster than floating rates, Stephens said.

"Those factors would force the markets to reassess the outlook and fixed term mortgage rates could rise quite rapidly."

Many variable floating rates are now between 6.2 per cent and 6.5 percent, with fixed two-year mortgages around 6.6 per cent and three-year around 7.1 per cent.

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Posted: 14 Jan 2011