High levels of personal debt tied up in mortgages is the biggest threat to New Zealand's banking system, the Reserve Bank has warned.
That's compounded by debt in the dairy farming sector, which could be exacerbated by the emerging risk of Mycoplasma bovis, the Reserve Bank said in its latest Financial Stability Report.
But Governor Adrian Orr said New Zealand's financial system remains sound and financial risks have reduced with both lending and house price growth slowing in the last 12 months.
As a result, more people are buying houses to live in, rather than as rental or investment properties.
"One thing that's pleased us is the shift in new loans from investors to owner-occupiers", he said.
"While there's been a slight uptick in house price inflation, it's not been accompanied by an increase in credit growth," Bernard Hodgetts, head of the Macro-Financial Department, said.
There will be no easing of mortgage lending restrictions for now.
And while interest rates remain low, the bank had this warning for borrowers:
"Caveat emptor, think very hard about what you're borrowing and what your debt ratio is," Mr Orr said.
He said those who have large debts could struggle if there's an abrupt change in interest rates.
"If international markets do react to the tightening in monetary policy we're seeing around the globe," Mr Orr said.
"There's good tightening and bad tightening. Good tightening [is] if a central bank's gradually raising rates because economic activity is growing. Bad tightening, as happened overnight with the Italian elections, [is] where markets get spooked. Those probabilities are small. They're not part of central projections, but we need to be able to weather them."
He said New Zealand's banking system holds sufficient capital and liquidity buffers to reduce the exposure of banks to adverse shocks.
Mr Orr said most dairy farms are currently cash-flow positive but remain vulnerable to any possible downturn in prices and agricultural shocks.
In relation to Mycoplasma bovis, he said there are highly vulnerable farms but they're small in number.
"It's a serious impact to farming, not necessarily to banking," Mr Orr said.
The Reserve Bank also said the conduct and culture of banks and insurers are still being jointly reviewed with the Financial Markets Authority and it will report findings over coming months.
It follows the Australian Royal Commission into misconduct in the banking, superannuation and financial services industry.
On Tuesday the bank launched its "Bank Financial Strength Dashboard", a standalone website, making it easier for customers and financial advisers to monitor and compare financial information across banks.
It's part of the Reserve Bank's push for more transparency and disclosure.
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