A call by a former Reserve Bank chief economist to flood Auckland with new houses to crash house prices by 40 per cent is "crazy", Prime Minister John Key says.

As reported in the Herald's Weekend Business, Arthur Grimes, who is now senior fellow at Motu Research and an associate professor at Victoria University, said drastic action was needed.

REINZ data shows Auckland's median house price reached $820,000 in March this year - a 66 per cent increase in only four years, Grimes noted.

The Government should try and cause a 40 per cent crash in house prices to bring Auckland's median back to about $500,000.

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Grimes, who was Reserve Bank chairman from 2003-2013, said one way to bring down prices would be to build an extra 150,000 houses over six years.

Key was asked about the proposal at his weekly post-Cabinet press conference today.

"I think it is crazy. Go and ask the average Aucklander who has got a mortgage with a bank if they want to see 40 per cent of their equity disappear," he said.

"What Auckland and the rest of New Zealand needs, where it is in high growth, is sustainable supply of housing to meet the demand.

"Actually destroying people's equity is not what this government is about ... it would leave an enormous amount of people who have just entered into the market with huge losses, and put enormous pressure on developers, that would put pressure on some of the banks."

Key said building 150,000 houses was unrealistic, given the current construction rate of about 9000 a year.

The Prime Minister - who has recently used the term "housing boom" instead of the "housing crisis" favoured by opposition parties - yesterday launched new housing policy, including a $1 billion infrastructure fund.