The size of deposits required for home loans and debt-to-income limits have been intended to curb rampant house price inflation but these haven't worked so far.
S&P warned of what might happen if nothing changed.
"We now view the economic risk trend as negative, reflecting a one-in-three possibility that in the next two years New Zealand financial institutions could face greater risk of a sharp fall in house prices, which could potentially result in higher credit losses, particularly if the growth continues unabated," S&P said.
"If the current trend persists, we expect to assess our economic risk score for the New Zealand banking industry as having worsened.
"Nevertheless, we expect to keep our issuer credit ratings on the six rated New Zealand banks and two rated non-bank financial institutions unchanged in that scenario, primarily reflecting the support of more highly rated parents," S&P said.
S&P said while its base case suggested an "orderly slowdown" of NZ house price growth, downside risks were increasing and a lot would hinge on whether policy measures were successful in curtailing property price growth.
S&P expects New Zealand banks' credit losses will return to pre-pandemic levels in one to two years.
"This reflects the New Zealand economy's faster recovery from the effects of the Covid-19 pandemic than most advanced economies," it said.
Treasury is expecting house price growth between 2021 and 2022 to be 0.9 per cent.
Treasury says house prices are expected to be roughly 16 per cent lower than they would have been in 2025, if the Government had not implemented a range of housing announcements this year: a $3.8 billion housing infrastructure, an extension of the bright-line test and the scrapping of the interest deductibility programme.
The Real Estate Institute's latest monthly data showed we have a long way to go to sink that low: new house price records have been set, with national prices up 19.1 per cent in the year to April and Auckland outstripping that, rising 21.6 per cent, REINZ announced on May 13.
"This is a very sharp adjustment in house prices but a very necessary one," Finance Minister Grant Robertson said in today's Budget lockup.
Westpac's Home Truths of June 16 also reiterated it was forecasting house prices to flatten this year.
"While there is some mild evidence of a cooling in the market, at best it's gone from
white-hot to just red-hot. That points to some upside risk to our house price forecast for this year," Home Truths said.
The greater test of the housing market will come once mortgage rates start to rise from their record lows, it said.
However, just today, further mortgage rate drops have been announced.
