KEY POINTS:
New Zealand's housing market is the riskiest, says an international study by credit rating agency Fitch Ratings.
It rates 16 developed countries by two sets of criteria - how much is housing overvalued, compared with historical norms, and how stretched are households' balance sheets.
New Zealand ranks fourth for overvaluation and second for household debt vulnerability.
To measure overvaluation Fitch looks at such things as how far house prices have risen over the past 10 years, adjusted for inflation, and how far the ratio of house prices to incomes, and house prices to rents, have strayed from their long-term trends.
To measure the health of household balance sheets it looks at how big their net debt, net wealth and interest payments are, relative to disposable incomes.
With high interest rates New Zealand has the most onerous interest to income ratio.
Fitch also looks at leverage - the ratio of gross debt to net wealth. "A highly leveraged household sector is more likely to undergo a severe adjustment in the event of an asset price downturn and a rise in financing costs," it said. New Zealand households are the fifth most vulnerable by that measure.
In the overall risk rankings Denmark is runner-up, before the United Kingdom. Australia ranks sixth and the United States, despite current jitters about the riskier "sub-prime" end of its mortgage market, ranks 10th in the 16-country list.
The Reserve Bank, in its submission to the parliamentary inquiry into monetary policy released on Friday, said the affordability of housing had fallen markedly since 2000, with average prices rising from four times average household disposable income to six times.
House prices rose 50 per cent over the 1990s but since 2000 have doubled. In real terms current levels of house price inflation have not been seen since the early 1970s.
But the bank noted that house prices had roughly doubled since 2000 in Britain too, and had almost doubled in Australia.
The boom had begun with the surge in net immigration which followed the September 11, 2001 attacks on the US but persisted after that surge.
It has been supported by strong growth in employment and incomes, but also, the bank believes, by the "increasingly widespread expectations of continuing rises in house prices taking hold".
More recently, banks' relaxation of lending criteria, such as loan-to-value ratios, had been "unhelpful", the Reserve Bank said.
