Soaring property prices leave central bank with interest rate rise dilemma

Rising home prices will increase the pressure on the Reserve Bank of New Zealand to raise interest rates, finance minister Bill English says.

"These households heading into quite high debt to buy highly priced houses need to be aware at some stage the [Reserve Bank] will increase interest rates, particularly if the housing market keeps growing at rapid rates," English said on Sunday in a television interview.

Low interest rates have helped fuel demand for property, raising prices at the fastest pace since 2007 and prompting the central bank to signal its concern about the risks if the housing bubble bursts. But central bank governor Graeme Wheeler is reluctant to increase the official cash rate from a record 2.5 per cent low because it may boost demand for the country's currency.

"I'm just stating the fact that interest rates are likely to rise at some stage," English said.

The government doesn't want borrowing costs to go as high as they did in the previous housing boom of 2006-07, when the cash rate climbed to as much as 8.25 per cent, English said. Last week it agreed with the central bank on new tools potentially to curb lending, and also announced plans to increase the supply of housing to ease pressure on prices.

"Rather than rely on the interest rate tool, which is what was used last time around, we've spent the last two or three years working out what the tool kit is that we need to beat the housing cycle," he said.

Wheeler can delay a rate rise until December because the strong currency and global conditions are curbing inflation, said Robin Clements, chief New Zealand economist at UBS in a research note yesterday. He previously forecast a quarter point rate rise in September.

Six of 15 economists surveyed by Bloomberg in mid-April forecast a rate rise this year. Nine expected no change.

The central bank may need to raise its interest rates if rising house prices and household borrowing fan inflation, the International Monetary Fund said this month.

Home prices leapt 9.8 per cent from a year earlier in April, the biggest annual rise since 2007, according to an index published May 13 by the Real Estate Institute of New Zealand, prompting Wheeler to urge banks to limit risky home lending.