Fix your mortgage – home buyers told

By JAMES WEIR – The Dominion Post

Home buyers can expect mortgage interest rates to start rising by the middle of next year and be 3 per cent higher in 18 months, economists say.

As widely expected, the Reserve Bank held the official cash rate unchanged yesterday at 2.5 per cent, because of a “patchy” economic recovery and uncertain outlook.

The central bank repeated its concerns about the high kiwi dollar and the damage being done to exporters. Most bank economists do not expect further immediate cuts in the official cash rate or mortgage rates, though one bank still expects two more small cuts in September and October.

But because interest rates are expected to start rising again, economists suggest home buyers borrow on a three-year fixed rate of about 7 per cent now, rather than risk short-term or floating rates of around 6 per cent next year.

ASB Bank chief economist Nick Tuffley said low interest rates were “reviving” the housing market. House prices were stabilising, though prices remained high compared with household income and rent. “House prices are no longer extremely expensive, just expensive,” he said. Rising unemployment would work against price rises, though a housing shortage could see a brief short-term pick up.

There was little risk of further big falls in prices. Bank of New Zealand chief economist Tony Alexander dismissed earlier predictions from some commentators that house prices could dive more than 30 per cent in the recession. The housing market was now recovering, although “it is not going to run away with itself for some time”, he said.

Positive factors included the housing shortage, low levels of new home building, rising migration and low interest rates. But that would be offset by a continued rise in unemployment and more investors being burnt after borrowing too heavily at the peak of the market boom.

But Mr Tuffley said rates would go higher, so people should leave a safety margin getting a mortgage. The economy should improve next year, so official cash rates could move back to about 5 per cent. “Given the uncertainty, it’s not bad to hedge your bets fix some debt for two to three years and have some on six months.”