The Reserve Bank of New Zealand has ramped up its warnings about New Zealand's over-valued and fast-inflating housing market, threatening higher interest rates and tougher capital rules for riskier mortgages.Deputy governor Grant Spencer detailed the Reserve Bank's concerns in a speech to the Employers and Manufacturers Association in Auckland yesterday.He said the Reserve Bank was concerned about both the risks to financial stability and inflationary pressures from a boom. The speech focused on the bank's experience during the 2002 to 2007 housing boom when a strong link developed between escalating house prices and the financial cycle, as consumers increased inflationary pressures by borrowing heavily against their inflated home equity."During the boom that link was accentuated with the emergence of widespread housing investment activity, bringing with it rapid credit growth, a high volume of offshore borrowing and upward pressure on the NZ exchange rate," Spencer said."Consequently, housing can be highly relevant for the Reserve Bank's monetary and financial stability policies," he said.Spencer noted the role of housing supply shortages in Auckland and Christchurch and some signs of internal migration to Auckland as factors in the strong housing markets.However, he also said a fall in fixed mortgage interest rates and an easing of credit quality in the last year were factors in the inflation.Spencer said the Reserve Bank's current projections were that households would not spend the perceived increase in household equity and create speculative investment and widespread house price pressures."So while new home owners will continue to take on new debt, we assume that existing home owners will continue to conserve or increase the equity in their properties, rather than seeking to 'gear up' existing housing assets," he said."There is a risk of course that our assumptions turn out to be wrong: that the housing market continues to gather momentum and that households return to their pre-GFC ways of borrowing and spending in excess of incomes," he said, noting an acceleration in consumption in the December quarter and a recent rise in household debt to income ratios after three years of falls.Spencer said there was a risk that riskier household balance sheets would translate into riskier bank balance sheets."We have concerns that the current escalation of house prices is increasing risk in the New Zealand financial system, by increasing both the probability and potential effect of a significant downward house price adjustment, that could result from a future economic or financial shock."Spencer then gave the bank's most explicit warning yet about a potential hike in the Official Cash Rate in response to the housing boom."If the house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures, a monetary policy response would become more likely. The Reserve Bank's flat interest rate outlook in our recent Monetary Policy Statement would need to be revisited," he said.He also pointed to previously announced proposals for higher capital requirements for higher risk mortgage lending and various macro-prudential controls, including possible Loan to Value Ratio limits.However, he noted such tools were not as