New Zealand must avoid a housing boom if it is to maintain economic and financial stability, particularly at a time when the economy faces overvalued exchange rate, an ongoing drought and a program of fiscal consolidation, Reserve Bank of New Zealand (RBNZ) Deputy Governor Grant Spencer said Monday.

On average, the gearing of New Zealand households was relatively low, but a growing number of households had high levels of debt with interest payments consuming a large portion of their income, which was putting pressure both on the households and the banks, Spencer said in a published speech to the Employers and Manufacturers Association in Auckland.

Easy credit conditions and rising house prices have prompted more people to buy homes, but with construction still at a slow pace, this had ramped up prices.

"We are left with concerns that the current escalation of house prices is increasing risk in the New Zealand financial system by increasing both the probability and potential effect of a significant downward house price adjustment that could result from a future economic or financial shock," said Spencer.

In the short to medium term, the RBNZ wanted to ensure that the banking system was adequately capitalized for the risks associated with mortgage lending, and also to avoid demand pressures that could create a destabilizing overshoot of house prices.

If the housing market momentum continued and added inflationary pressures, a monetary response would become more likely.

Macro-prudential tools could help rein in credit supply decisions by banks and moderate credit demand from households.

Two areas fueling the house price pressure were the biggest city of Auckland and the earthquake-battered second city of Christchurch.

An industry report last week forecast the national average house price would rise 8.6 percent by the end of the year, with Auckland's average set to jump 12 percent. Endi

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