Prime Minister John Key says the Trans Pacific Partnership will not technically prevent a future Labour Government from banning the sale of residential properties to foreigners.
But breaching the trade deal's obligations could lead to a legal challenge from other countries, he said this afternoon.
The 12-nation agreement includes a non-discrimination provision which says New Zealand cannot ban Trans Pacific Partnership (TPP) countries from buying New Zealand property.
Labour leader Andrew Little says Labour will flout this rule if it enters Government because it believes a ban on foreign ownership of houses is in the best interests of New Zealanders.
Mr Key told reporters at his weekly press conference that there was nothing to stop future governments from going against the TPP's provisions.
"In the end governments make their own call and it's up to others whether they want to go and challenge that.
"Technically people can go and do all sorts of things. It just means if someone wants to take a case against them and dispute that, they may have a much stronger argument.
"I'm not saying it's okay. I'm just saying technically any government can flout any free trade agreement rules that they set, and there will be a process for arbitration of those if someone wants to take ... a case against them."
Mr Key said there was no guarantee that another country would object to a ban on foreign buyers. He pointed to Australia's ban on New Zealand apples, which was in place for 80 years before New Zealand took a case to the World Trade Organisation.
The Government is collecting data on non-resident purchases of houses. Mr Key said that if offshore buyers were found to be a major factor in rising house prices, his preferred deterrent would be a land tax, not a ban.
Under the TPP, New Zealand would retain the ability to impose new taxes on foreigners.
The Government would also retain the right to screen foreign purchases of sensitive land such as farms, which would still have to pass a "benefit to New Zealand" test.
It was unclear at this stage whether the Overseas Investment Office would also be able to expand the list of what qualified as "sensitive land".
The Labour Party is expected to hold a press conference on the TPP this afternoon, after its first briefing from Trade Minister Tim Groser.