Reserve Bank governor Alan Bollard says the housing market is in recovery mode but is not expecting a surge in prices.
His comments come despite the central bank's twice-yearly Financial Stability Report released on Wednesday morning which says houses are over-valued and could fall further.
Asked about the report by MPs during a finances and expenditure select committee meeting on Wednesday, Dr Bollard downplayed the possibility of further falls in house prices.
Real Estate Institute figures for April show further signs of stabilisation in the housing market, particularly in Auckland. Nationally sales were up 3% for the month on a seasonally-adjusted basis.
"Auckland is the place where there's a clearly defined need because of the big demographic. There hasn't been much building for a long time there, so there needs to be," Dr Bollard told MPs.
"Are we going to see Auckland house prices really rip away? I don't think so - I think we're a long way away from that. I think New Zealand is going to be quite cautious about that."