That's what I'm doing on the Extreme Urban, changing the rear wheel size from a 14" to a 16". I bought an extra front wheel and I'm lacing it to an Urban rear hub. The hubs (frt & rear) are identical, other than the rear has the drive spline. I checked the fender and it will work fine and looks proportional because it was designed too big anyway. The 16" rear wheel will net about 5 mph when combined with the 2.50 X 16" Pirellis I'll be running.
This idea won't work on my 1982 NC50 though due to space constraints. The Urban has about 2" stretched rear-end wheelbase.