The Treasury says Government efforts to make it easier for people to buy their first home will undermine attempts to protect the financial system.
Newly released documents show the Treasury warned that changes to the Government's Welcome Home Loan programme and KiwiSaver home deposit scheme would work against the Reserve Bank's new rules to limit low deposit loans and cool an overheated Auckland housing market.
The Treasury endorsed mortgage restrictions to help protect the financial system if anything went wrong.
However, it warned that Government efforts to help first time home buyers will undermine its effectiveness, saying up to half the estimated 6000 to 8000 home buyers affected by the restrictions would now be able to avoid them.
The Treasury warned the changes may weaken banks' lending standards and reduce the Government's contingency funding.
It also questioned the need to lift house price caps under the new KiwiSaver rules.
The Treasury went further, suggesting a capital gains tax or restrictions on overseas buyers could help contain demand.
Housing Minister Nick Smith dismissed the Treasury's advice, saying it decided to support home buyers.
Dr Smith said the Government considered the department's advice but decided first time buyers needed a helping hand.
"Their job is to save money and they're never very keen on spending it, the Government's view was that first home buyers needed a bit of a break and that it was good use of public money."