Auckland's sharply rising house prices and growing household debt are the two biggest risks to economic growth, a new report warns.
The New Zealand Institute of Economic Research (NZIER) quarterly report predicts economic growth to average 2.5% over the next few years.
It says growth will be gradual, boosted by one-offs such as the Canterbury rebuild and a rapid rise in household borrowing.
It says Auckland house prices have risen sharply over the past year and warns that when prices "stretch too far from incomes they may fall if there is an economic shock".
The report cites the USA and UK, where real house prices fell by nearly one third in the latest recession, and says such a drop can have significant ramifications for the financial system, household wealth and economic activity.
The NZEIR expects the Reserve Bank to start lifting the Official Cash Rate at the beginning of next year.
But principal economist Shamubeel Eaqub told Radio New Zealand's Morning Report programme that before interest rates rise, the bank will use other economic tools to rein in high prices in Auckland and Canterbury and reduce the high level of personal borrowing.
