According to the RBNZ's latest biannual Financial Stability Report (FSR), home loan borrowers are taking on debt at ever higher levels, leading to greater risks in the financial system.
The central bank said prices were "less sustainable than before", with people requiring larger deposits to get on the ladder.
The central bank deputy governor Geoff Bascand said the lending trends make recent borrowers more vulnerable to a rise in mortgage rates, and expose them to a decline in house prices.
His comments come as economists call a trough in the current interest rate cycle. Most commentators expect the next move in the OCR will be up, not down.
In the FSR, the Reserve Bank notes that interest rates could rise "if the economy continues to strengthen and inflationary pressure builds".
Bascand's comments about borrower vulnerability come as rumours swirl about the introduction of debt-to-income ratios and curbs on interest-only lending.
The comments indicate deepening concerns about debt to income levels in the soaring housing market, with first home buyers stretching to get on the ladder.
This takes place as the RBNZ reviews DTIs and the potential introduction of interest-only limits. Finance Minister Grant Robertson is said to be keen on more restrictions.
In its latest report, published this morning, the RBNZ said it expects investor lending to slow following the introduction of tighter LVR restrictions.
The Reserve Bank said the vulnerability of the overall home loan market was "low" when including older mortgages.
In February, Grant Robertson instructed the RBNZ to take house prices into account when setting monetary policy.
Future lending changes
The Reserve Bank gave some insight into its thinking on future lending changes.
It said "additional policy options" were available, including measures to "dampen investor demand, which may improve affordability for first home buyers".
If tightened policy settings are required, the Reserve Bank said the "most straightforward approach" would be to tighten LVR rules further.
With regard to new tools, the central bank said "our assessment is that a debt serviceability tool would be the best option for supporting financial stability and sustainable house prices over the medium term".
It added: "Restrictions on interest-only lending would likely have less impact on overall lending conditions than alternatives, while being challenging to implement and enforce."
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