New Zealand's central bank has warned of increasing risks in the country's dairy sector as milk prices continue to drop. In a statement, the Reserve Bank of New Zealand said the forecast for the dairy sector in the coming season has reduced significantly. The low payout may cause more loan defaults if low milk prices persist.

RBNZ Deputy Governor Grant Spencer noted in the bank's Financial Stability Report that the forecast payout from Fonterra, New Zealand's biggest dairy exporter, for the current year has dropped to NZ$5.30 per kilogramme of milk solids from the previous price of NZ$8.40 in 2013. According to the report, lower prices were largely due to lower demand from China.

Spencer said New Zealand's dependence on the Chinese economy only increases the country's vulnerability despite its sound financial system. However, the RBNZ expects milk prices to "somewhat" recover by early 2015 as it expects longer-term support because of China's rising income and urbanisation.

Meanwhile, New Zealand's housing market is expected to cool with restrictions on bank home loans, but RBNZ's Graeme Wheeler warned that strong migration would trigger house price inflation. He said thAT net migration was nearly zero in 2012, but it increased to more than 45,000 people as of September 2014. Pressure on the house market has eased since the bank's introduction of stricter loan-to-valuation ratios on mortgages and interest rate hikes.

Since OctOBER 2013, most of the borrowers were required to provide at least a 20 percent deposit to secure a home loan. Latest figures of the central bank revealed that the country's annual house price inflation has dropped to 5 percent from 9.4 percent in 2013.

Critics of the tighter restrictions have slammed the central bank for penalising first-time home buyers and lower-income customers who are still saving for bigger deposits. Wheeler said overall home sales to first-time buyers fell slightly to 17 percent from 19 percent. ABC reports that the level is higher than Australia which has an estimated 7 percent of new home loans. Australia's central bank is also considering lending restrictions as it is concerned oVer rising house prices.