(Adds detail from speech)
WELLINGTON, July 7 (Reuters) - An overheated housing market continues to pose a risk to New Zealand's financial stability, with the central bank now contemplating making its mortgage lending rules even more stringent.
The Reserve Bank of New Zealand (RBNZ) said it was considering tightening its loan-to-value ratios further, possibly by the end of the year. It was also examining whether it should limit debt-to-income ratios, but said "further investigation of this option will be undertaken."
New Zealand's housing prices, spurred by low interest rates, high levels of immigration and supply shortages, are the second fastest-growing in the world after Qatar, according to the International Monetary Fund.
"Growing imbalances in the housing market require policy action on a number of fronts," Deputy Governor Grant Spencer said in a speech posted to the RBNZ's website on Thursday.
"The longer the boom continues, the more likely we will see a severe correction that could pose real risks to the financial system and broader economy," Spencer added.
The hot housing market has long been a concern for the central bank - particularly Auckland, New Zealand's largest city.
House prices rose 13.5 percent in the year to June, the fastest pace in 12 years, and soared 16.1 percent in Auckland, according to national valuer QV.
The RBNZ has previously tightened lending rules to curb soaring house prices. It said in its May financial stability review that those measures have reduced the extent of riskier bank lending.
The central bank noted that low domestic interest rates have contributed to increasing housing demand. The RBNZ's official cash rate is currently at a record low 2.25 percent.
Spencer said while the RBNZ's central focus was holding inflation in a 1 percent to 3 percent target band, "the bank must (also) consider whether its monetary policy choices could undermine the efficiency and stability of the domestic financial system."
Inflation is currently running at 0.4 percent. The bank is barred from using monetary policy to "actively lean" against the housing cycle, but it noted that any further cuts to the cash rate could pose a risk to financial stability.
"While the outlook for CPI inflation will ultimately determine the future path of monetary policy, the trade-off against financial stability risk needs to be carefully considered," he said.
