The Reserve Bank says the housing sector risk to New Zealand's financial stability has reduced, but there are increasing risks posed by the weakness in wholesale dairy prices.
The central bank has released its twice-yearly Financial Stability Report said the financial system is sound.
But it said the forecast farmgate milk price for the coming season has been reduced significantly, which could result in rising loan defaults, if the lower pay out level persist.
Last season's payout per kilo of milk solids was $8.40, while this season's forecast is for $5.30 and expected to fall further.
Deputy governor Grant Spencer said reduced demand for dairy from China had played a large part and that this highlighted New Zealand's vulnerability to a slowdown in the Chinese economy.
Economist with the Bank of New Zealand Doug Steel said the central bank's concern with dairy prices is not a surprise, but its view on house prices is.
The Reserve Bank said it is too early to lift restrictions on home lending because an unexpected surge in immigration could push house prices back up.
