The Reserve Bank of New Zealand has issued its strongest warning yet that it needs to limit the growth of high loan to value ratio mortgages to cool an over-heated housing market.Reserve Bank Deputy Governor Grant Spencer used a speech to the Business NZ to spell out in detail why the bank is "seriously considering" speed limits on high LVR loans. "The current overheated housing market is a threat to future financial stability," Spencer said. However, he ruled out using a lift in the Official Cash Rate to slow mortgage lending growth, which was now back to levels seen at the end of the last housing boom from 2002 to 2007."With some slack still in the economy, housing cannot yet be described as a threat to overall inflation. Higher interest rates are not the right policy response at this time," Spencer said.He acknowledged supply shortages in Auckland and Christchurch, but said strong demand supported by easy credit was underpinning house price inflation in double digits in New Zealand's two biggest cities.Spencer said a LVR speed limit, which is one of four macro-prudential tools the bank could use, was the one with the "best scope to dampen the current strong demand for housing, as well as reducing the risk to bank balance sheets."But he said such a limit was no panacea and could introduce market distortions."However, we need to assess inefficiencies against the potentially significant economic and financial damage that could result from a housing boom that ends in a severe housing downturn," he said."While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term."Spencer said the bank now believed with the benefit of hindsight that it would have used such macro-prudential tools before the Global Financial Crisis to reduce systemic risks."In the current situation, with house prices and household debt ratios starting from much higher levels, and with interest rates at historically low levels, the risks to financial stability may well be greater," he said.Westpac senior economist Michael Gordon said the detail and tone of the speech showed the central bank was serious about applying speed limits, possibly as soon as the next few months."There was nothing veiled about today's speech," Gordon said.The Reserve Bank's latest round of consultation with banks over speed limits on high LVR lending ends on July 3.