Mortgage rates rise - more to follow

By NATASHA HARRIS and BRIDGET CARTER

Three of the five main banks have raised their variable mortgage rates amid signs that further rate rises may follow.

As a result, some economists are predicting a slow cooling of the housing boom.

The ASB Bank yesterday raised its floating rate from 7.05 to 7.25 per cent.

The Bank of New Zealand raised its rate from 7.1 to 7.25 per cent on Monday.

Westpac raised its rate by the same amount last month.

The ASB said the rise would increase the cost of a 20-year $100,000 loan by $12.08 a month.

National Bank chief economist John McDermott said interest rates were likely to keep nudging up.

"The housing market has been running hot for quite a while now and it wouldn't be surprising if it started to come off the boil a bit."

He did not expect a collapse, but said the increases in house prices over the past year were not sustainable.

"They will slow down and interest rates will help that along."

The Reserve Bank left its official cash rate unchanged in its review last Thursday, although Governor Alan Bollard warned that it was prepared to move "in the nearer future".

Some banks have increased their rates after a steady rise in the 90-day bank bill rate - the wholesale interest rate at which banks borrow - from 5.07 per cent to 5.29 per cent yesterday.

Westpac spokesman Paul Gregory said that when the 90-day bill rate hit 5.42 per cent in November, the bank decided to "pass on some of the increase to customers".

Bank of New Zealand spokesman Owen Gill said the increase reflected the increasing cost of borrowing throughout the economy.

Some economists believe the Reserve Bank is achieving its goal of cooling the housing market, which has been running hot since September 2001.

Professor Bob Hargreaves, head of property studies at Massey University, said rising mortgage rates would mean some buyers would not be able to spend as much on a house and could crowd some people out of the market.

"It depends how much they go up," he said.

"If they go up a small fraction, it won't have an effect immediately."

Real Estate Institute national president Graeme Woodley said a small increase would not have a large effect on the housing market.

Much would depend on Dr Bollard's actions next year.

Council of Trade Unions economist Peter Conway said the greatest effect would be on low-income workers.

"The effect is that low-income workers would be getting into a stage of considerable despondency about trying to buy a home."