The Reserve Bank will consider easing restrictions on mortgage lending before removing them altogether.
The central bank says house price growth is 2.5 percent lower than it would have been without the limits on low deposit loans.
The Reserve Bank said rising house prices and high household debt were risks. Photo: RNZ
In the first of its twice-yearly reviews, the Reserve Bank says the financial system remains sound, but it warns that high levels of household and dairy farming debt remain a threat if there's an economic shock to the country.
Deputy governor Grant Spencer says the mortgage lending restrictions introduced in October are working, and along with higher interest rates and more house building, should help cool the market.
Deputy Reserve Bank Governor Grant Spencer. Photo: RESERVE BANK
Mr Spencer says the restrictions could be lifted by the end of the year, but the central bank will consider easing them first. He reiterated that the restrictions will be temporary, saying they lose their effectiveness over time.
The Reserve Bank also pointed to high levels of debt among a small proportion of dairy farmers.
Global dairy prices have fallen by a fifth in recent months, and it warns if falling dairy prices feeds through into lower land prices, it could place pressure on heavily indebted farmers.
The Reserve Bank says New Zealand's growing reliance on China as an export destination is one risk to farmers' livelihoods.
Analysts say China's financial system is vulnerable to its lending and property boom, which could hurt economic growth and the international capital markets if there is a sudden collapse.
The central bank also says a persistently high external debt and ongoing current account deficits leaves New Zealand vulnerable to any global downturn, though strong deposit growth in recent years has helped reduce the reliance of the banking system to overseas funding.
