Business New Zealand also wants the Government to keep out. Its chief executive Kirk Hope said limiting lending on property could hamper smaller companies' attempts to grow.
Collins told Morning Report that it was "entirely appropriate" for National to suggest that the Reserve Bank should consider how trading banks were going to use the money.
"This money is being created; it is being used there to supposedly keep the economy going but if the economy is nothing more than increased housing prices without increased supply of houses and increase to the productive sector I say that's actually quite a recipe for disaster.
"So I think it is our job to question and it is the Government's job to do better than just cross their fingers and hope it's all good."
Collins said it was important to remember the country had never seen this amount of money being created by credit transfers into trading banks with no controls on what those banks should do with it in terms of putting money into the productive sector.
"Our economy cannot sustain itself if it's just going to continue to have enormous amounts of money put into increasing house prices and yet businesses are failing because they can't get access to capital.
"I think this is actually a very dangerous situation and the UK and Australian governments have also felt that."
She said the country was experiencing "extraordinary times" and a housing market showing a massive growth in prices without more new housing being built.
It was a "sad situation" that since March, $8.7 billion extra has gone into the housing market without any real effect in terms of the numbers of extra houses.
While interest rates are low, unemployment has not increased as much as initially feared and the economy has not tanked, Collins said it was important to realise that New Zealand has not yet seen the full effect of some of the fiscal concerns and monetary concerns that bodies such as the International Monetary Fund are forecasting for the economy.
"And we've got this massive amount of created money out there in the banking system all going to push up housing prices. I'm not sure I would consider that necessarily working but it's certainly going to work for those who already have homes."
She said it wasn't appropriate for the Government to cross its fingers and hope everything is going to be fine when developers couldn't get funding to build new houses.
She disagreed that she was crossing a line, and pointed out that in 2018 the government changed the mandate of the Reserve Bank to make employment part of the equation.
Economist favours tax reform
Westpac's chief economist Dominick Stevens is predicting an annual rate of 15 per cent increase in house prices by June 2021 and 13 per cent growth for the calendar year.
He is also expecting interest rates to fall another half a per cent, meaning a mortgage rate of under 2 per cent for a two-year fixed term.
Stevens said the most important question was what would be the alternative to the Reserve Bank's funding for lending scheme.
"So rising house prices clearly are a social negative we don't like but what could the Reserve Bank do differently? If they fail to reduce interest rates the consequence would be deflation and that would be worse."
He explained that deflation means the price of goods and services go down but debts don't, so when businesses fail the size of the debts outweighs the value of the businesses putting pressure on the banking system.
It was tried in Sweden in the last decade and they ended up with inflation and interest rates below zero, Stevens said.
Low inflation leading to low interest rates is a global phenomenon, he said, and New Zealand had no chance of stopping the trend.
The government has undertaken an "appropriate degree" of fiscal stimulus which was a useful weapon although the funds borrowed would have to be repaid at some point.
Stevens, who believes a wealth tax will be introduced at some stage, said in the past 30 years house prices have risen much faster than rents so that means financial factors such as interest rates and taxes have played a dominant role in driving them up.
"I think the public sector of New Zealand has failed to recognise the role that interest rates play or the relative importance of them in the scheme of things that affect housing markets and that's led to this failure to realise that tax change could be the answer."
If it was all about supply rents would be increasing as fast as prices.
"I think the best solution would be comprehensive tax change. I think a capital gains tax would have been a very good idea ... I think over time these social pressures from these ever rising house prices are just going to build further and further and further and that will create a larger and larger constituency of people who are prepared to vote a better tax situation for themselves ...
"The democratic factors will switch in favour of some form of broadening of the tax system to cover housing better."
Support for Liddell
National leader Judith Collins also repeated her party's support for Chris Liddell, currently deputy chief of staff in the Trump administration, and the US's nomination to head the OECD.
She said the experienced businessman would work more in New Zealand's interests than anyone else in the role.
Asked if his appointment would be in the country's interests given the Trump administration has undermined the WTO and various global treaties, she said: "I'm sure you'll find that when he's in that job, should he be fortunate enough to get it, he will be looking to the whole of the situation, particularly for New Zealand."
The Government is yet to decide if it will back Liddell's nomination.
