The Reserve Bank is preparing more tools to cool the housing market as it continues to warn about unsustainable prices and the risk from a slide in the market and higher interest rates.
The central bank's six-monthly financial stability report said the financial system is solid and able to support the economy through the current Covid-19 related uncertainty and recovery.
But RBNZ Governor Adrian Orr has repeated long standing concerns about risky lending and the hot housing market.
"Strong demand for housing has pushed house prices above their sustainable level, increasing the chance of a correction. Recent buyers are borrowing more relative to their income, and may be vulnerable to higher mortgage rates or a fall in house prices."
He said the RBNZ was finalising debt-to-income ratios (DTIs) and debt servicing measures as potential measures to cool the market further, which it expected to start consulting on soon, but it also expected a tougher stance from banks.
"We expect banks to be more cautious about high debt-to-income loans given the risks of rising interest rates and to the economic outlook," Orr said.
The RBNZ has long favoured DTIs, which would set lending limits against a borrower's income. It is also looking at requiring banks to have minimum interest rate levels, which would measure a borrower's ability to service loans.
Orr said interest rates around the world were likely to rise to counter rising inflation pressures, but would also act as headwinds to "stretched" asset prices such as shares and property.
He said the latest Delta outbreak was stressing some sectors, and consumer behaviour was changing as people adapted to Covid-19 becoming an endemic disease.
The report also highlighted stresses on some parts of the economy from rising inflation and supply bottlenecks, and the rising risks from climate change such as droughts and extreme weather.