Finance Minister Bill English says the Auckland housing market is on fire, and people need to be careful not to get burned when prices fall.
Mr English said when house prices rise as fast as they have in Auckland, they do fall. He said growth may slow down, and some people may have borrowed too much.
The Reserve Bank yesterday cut the official cash rate to 2.75 percent, and said more cuts were to come.
But it also said the Auckland housing market was in dangerous territory. The bank said prices in the country's biggest city were not sustainable and the faster they climbed, the harder they could fall.
The Government responded by warning buyers they could get caught out and the current very low interest rates would not last forever.
Economic Development Minister Steven Joyce said people could pay too much for a house and later face higher interest rates.
The Labour Party's finance spokesperson, Grant Robertson said the Government needs to do more.
"We've now got in Auckland one of the most unaffordable housing markets in the world. We've got a house price to income ratio of nine to one.
"Young New Zealanders are being priced out of the housing market in Auckland, but it's also now seeping into other parts of the country as well."
Mr Robertson said the Government needs to get into Auckland and start building houses.
Reserve Bank governor Graeme Wheeler said two years ago investors accounted for 33 percent of transactions in the Auckland housing market, but now they made up 41 percent.
Mr Wheeler said in overseas housing markets where there have been large house price corrections, investors have been more likely to default on their loans.
Meanwhile, a leading economist said the Auckland housing market is a growing risk to the country's economy.
Shamubeel Eaqub told Radio New Zealand's Morning Report programme the Reserve Bank may have to intervene - even though it was not its policies that were inflating the market.