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Mortgage rates on way back up

MORTGAGE rates are going up and property prices are going down, thanks to more inflation-fighting medicine from Reserve Bank governor Alan Bollard.

Dr Bollard lifted official interest rates from 6.5 per cent to 6.75 per cent. Another rise to 7 per cent was possible in April or June, economists said.

Westpac Bank has lifted floating mortgage rates from 8.75 per cent to 9.05 per cent. Floating mortgage rates could move to 9.25 per cent late next month, according to economists.

Predictions are that fixed and floating mortgage rates could rise half a per cent or more this year.

The rate rise was also expected to nudge up one-year fixed rates from about 7.8 per cent closer to 8 per cent, with more rises to come this year.

Westpac's call account deposit rate is increasing from 6.1 per cent to 6.3 per cent.

Westpac Bank chief economist Brendan O'Donovan said: "By the end of this year [house] prices will be down about 5 per cent. Most of the correction in prices will be in investors [property], not owner-occupier houses."

Bank of New Zealand chief economist Tony Alexander said higher rates would knock the housing market. Prices would flatten out this year, but fall up to 10 per cent next year.

It was better to rent than buy at present because, in the past three years, average house prices had risen about 55 per cent, while rents were only up about 10 per cent.

"For low-income first-home buyers, my advice would be to rent," Mr Alexander said, and consider buying in two or three years.

Mr O'Donovan said the rates rise was not needed, and there was a chance of a recession next year.

"Reports of manufacturers shifting production overseas and plant closures are only going to grow from here," Mr O'Donovan said.

"We risk a hard landing. [recession] is a possibility next year."