New Zealand is "using the credit card to pay the mortgage" and if it continues we will lose our sovereignty to Australia, politicians were told today.

Commentators told opposition MPs holding an inquiry into bank pricing that New Zealand's obsession with property was the cause of most economic problems.

The inquiry was launched after government MPs on Parliament's finance select committee voted against an official inquiry.

The MPs, from Labour, the Greens and Progressive, were concerned that changes in the Official Cash Rate (OCR) were not being passed on to bank customers.

Bernard Hickey, managing director of interest.co.nz, told the inquiry the New Zealand economy was not an economy but a "housing market with a few other things tacked on".

Mr Hickey said in the past nine months Australian banks underwrote the New Zealand "economy".

Australian banks have a third of their assets "stuck" in New Zealand which could mean political and monetary problems in the future, he said.

If it continued there would have to be a "shot gun wedding" between the Australian and New Zealand banking and monetary systems.

New Zealand's obsession with property saw banks' profits double in the last decade, because borrowing doubled, Mr Hickey said.

Banks were "subsidising" cheap home lending with business lending and were more comfortable lending to property.

"We have to reduce our standard of living to pay back debt."

To do that the Government needed to introduce a flatter, simpler tax system and either land or capital gains tax, Mr Hickey said.

Adding GST to mortgages and rent was another tool.

There needed to be less property speculation and more "productive investment".

Introducing a capital gains tax would be a "huge signal to New Zealand's property bubble" and there would be an immediate drop in house prices of 10-15 per cent, he said.

BERL chief economist Ganesh Nana agreed with Mr Hickey that property was the problem.

Economic literacy in New Zealand was "not economic" because all anyone wanted to know about was interest rates and property prices.

New Zealand's economic framework was not business or investment friendly and there was an obsession with the OCR, he said.

The "major deterioration" of the economy was not from a failure to pass on cuts in the OCR but the high debt of the banking sector caused by consumers borrowing to buy houses.

"You can't just control the price (interest rate) of money but must control the amount of money (credit availability) to ensure banks are meeting the needs of the New Zealand economy," Dr Nana said.

"Change in economic structure is needed."

The economy must move from property to production, he said.

"Those in property are going to be losers."

Financial sector union Finsec told the inquiry it wanted to see the establishment of an independent financial consumer agency to provide education and regulation to the sector.

Banks were "driving debt creation" rather than fulfilling existing debt, Finsec said.

Kiwibank chief executive Sam Knowles said while Kiwibank aimed to grow its customer base to increase profit, the Australian-owned banks wanted to make money off current customers.

Mr Knowles said at the moment the amount of funding influenced by the OCR was "really quite small".

International funding had been expensive but was now much cheaper, Mr Knowles said.

The inquiry will hear submissions tomorrow too.

- NZPA