The Reserve Bank is to further restrict lending as it develops a new tool tying debt to income as it warned of a "problem" of too much risky lending.
On Tuesday the central bank and Finance Minister Grant Robertson announced they had agreed a deal to amend their agreement on tools the Reserve Bank can use to limit lending.
This clears the way for the Reserve Bank to develop a new debt-to-income restriction, so long as it avoids as best it can hitting first home buyers.
But the announcement came with a sharp warning from deputy governor Geoff Bascand who described the level of risky lending in New Zealand as a "problem".
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"If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage," Bascand said.
"We've already made adjustments to Loan-to-Value Ratio (LVR) restrictions to partially manage this risk, but we haven't seen a sufficient reduction in risky lending."
The Reserve Bank said it would consult on making the LVR rules even tighter "in order to prevent this problem from getting worse".
It is proposing halve the amount of high LVR lending to owner occupiers - meaning lending more than 80 per cent of the value of a property - to 10 per cent of all new home loans.
The new rules could be in place from October.
The announcement of changes to LVRs came as Robertson and Reserve Bank governor Adrian Orr struck a deal over new lending tools.
"I have largely agreed to the Treasury and Reserve Bank's proposed update to the [memorandum of understanding] to add debt serviceability tools, but as I indicated in June this extension should not unduly impact first home buyers," Robertson said in a statement.
An amendment to the agreement states that in "designing and implementing a debt serviceability restriction, the Reserve Bank will need to have regard to avoiding negative impacts, as much as possible, on first home buyers," according to Robertson's office.
"I believe this agreed wording will set clear public expectations while maintaining the operational independence of the Reserve Bank," Robertson said.
"It is still up to the Reserve Bank how it chooses to introduce any restrictions, having had regard to this condition."