New Zealand's second tier of licensed banks have ramped up their lending to residential property developers at a time the dominant players have adopted a more cautious approach to the sector.

The Reserve Bank's latest six-monthly financial stability report shows the nation's system is still in good health, due largely to the dominance of the four Australian-owned banks whose profitability allows them to conserve enough capital to provide a buffer in the event of a severe downturn.

However, the major banks have also scaled back their exposure to residential development as escalating construction costs put more marginal projects at risk, particularly in financing new apartments.

The country's smaller banks have stepped in to fill the gap, led by the local branches of foreign-owned banks, and now account for about 18 per cent of total loans to the sector having boosted lending by 80 percent, or $250 million this year, the report said.

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"The smaller banks have been increasing their market share and doing more business as the major banks have taken a more cautious approach with their lending," acting governor Grant Spencer told reporters in Wellington yesterday.

"We've looked at that and we're confident the small banks, while increasing their lending, are not stretching in terms of dropping lending standards. It's still good quality lending even though volumes are increasing, but we are continuing to monitor that."

The major banks started adopting tighter lending criteria last year as escalating construction costs squeezed margins for developers, despite the major pipeline of work required to address a lingering housing shortage that's contributed to rapid house price inflation.

That tougher approach combined with an up-tick in interest rates and lending curbs imposed on highly-leveraged mortgages to take the wind out of the market, which the Reserve Bank now sees as having cooled enough to start easing those restrictions.

RBNZ head of macro financial stability Bernard Hodgetts told BusinessDesk the major banks aren't "closed for business" but are more circumspect about their exposures, particularly for new apartments, and aren't looking to increase the size of that lending relative to the rest of their books.

"There's undoubtedly some frustrated developers out there and that's likely to continue to remain the case given the banks are not showing any signs of wanting to ease up on that availability at this point," he said.

Hodgetts said that isn't creeping into commercial property, which the financial stability report notes has historically been a major source of credit losses and is monitored by the central bank as a result.

Risks in the sector are well-contained and a slowing in credit and prices have reduced those risks over the past six months, the report said.

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"Commercial property prices have come up a long way so you might expect a little bit more caution to enter into that market," Hodgetts said.

"No-one is really talking about the risk of oversupply of commercial property. If anything it's been quite striking how moderate the supply response has been."

The smaller lenders have also been grabbing market share in residential mortgage lending, with housing credit among the minnows expanding 30 per cent in the year to September, outpacing a 5 per cent increase by the five biggest lenders, the report said.

Over the past two years, the minor banks have increased their housing loans 50 per cent to $12.5 billion.

Hodgetts said new banking entrants in recent years have been looking to grow their exposure, but the bank doesn't have any major concerns about that expansion in areas such as property development.

'We want them to do that prudently," he said. "From a broader financial efficiency point of view, it's good to see these other players in the market. It does add a bit more of a competitive dynamic and bit more choice."