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New Zealand FinMin: Property prices a 'concern' but under control

Phil Walter | Getty Images

New Zealand's frothy property market is a key concern but the bubble will likely deflate over the next two to three years, New Zealand's Deputy Prime Minister and Minister of Finance Bill English told CNBC.

House prices spiked to record highs in August as demand has outpaced supply in New Zealand's largest cities.

Government property valuer Quotable Value (QV)'s residential property index rose 8.5 percent in the year to August 30, 8.3 percent higher the market's previous peak in late 2007, and up from a 8.1 percent annual rate in July, Reuters reported.

(Read more: Rate hike talk boosts New Zealand dollar)

Meanwhile, average home prices in New Zealand rose to NZ$390,000 (US$320,881) in August from NZ$385,000 in July, data from the Real Estate Institute of New Zealand showed this week.

While English is "concerned" about rising prices, he believes the right steps are being taken to deflate a potential bubble.

"There are two things happening. The Reserve Bank of New Zealand has introduced measures to control demand, and probably more importantly, the government...is embarking on a significant program to expand supply by dealing with regulation that has restricted supply artificially in our largest cities," he said.

"We think in the next two or three years... [the measures] will have a significant impact on property prices," he added.

(Read more: The trade that has plenty of 'juice' in it)

Last month New Zealand's central bank announced its intention to impose lending restrictions on low deposit-high value house loans, in an attempt to dampen rising prices in the sector.

Much like Australia, New Zealand's economy is closely linked with China's economy, and English acknowledged rising fears of a credit bubble in the world's second largest economy were a concern.

"[There is] a risk of a negative surprise... we are hooked to the Australia-China train, so Chinese credit conditions are a concern," said English.

(Read more: China's colossal credit bubble next big risk: Faber)

"In the last day or two I'm hearing quite a bit of positive feedback that Chinese authorities will be able to manage that, but [a negative surprise] is a possibility. We've seen what happens if credit bubbles go wrong. Let's hope the Chinese get it right," he added.

The New Zealand Deputy Prime Minister also said that he was comfortable with the New Zealand dollar's current trading levels, despite Tuesday's rally to US$0.8248, a level not seen since mid-May.

"It's come back up a bit but that's a comfortable region for us," said English.

(Read more: Is China right to brush aside credit squeeze?)

"We would prefer it to be a bit lower, because our export sector has proven to be extremely resilient through a period where the trade weighted index was quite high. But we would like to see more profitability there to get the reinvestment and growth in our export sector, so a bit lower would help," he added.

Correction:

This story has been updated to reflect the proper exchange rate between the U.S. dollar and the New Zealand dollar.

By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.