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UPDATE 1-RBNZ says banks face less risk, house prices on its radar

(Adds market reaction, background)

WELLINGTON, May 31 (Reuters) - The Reserve Bank of New Zealand said on Wednesday that risks facing the country's financial system have lessened in recent months but that any resurgence in house prices would be a worry.

While the global economic outlook has improved and domestic house price growth slowed, the rate of housebuilding remains insufficient to meet demand, the RBNZ said in its half-yearly Financial Stability Report.

The central bank said it will soon release a consultation paper proposing the addition of restrictions on high debt to income loans into its macroprudential arsenal. It has said it has no immediate plans to use those measures.

"While the LVR (loan-to-value ratio) restrictions have increased the banks' resilience to any fall in house prices, a significant share of housing loans are being made at high debt-to-income (DTI) ratios," RBNZ Deputy Governor Grant Spencer said.

"Such borrowers tend to be more vulnerable to any increase in interest rates or declines in income."

The New Zealand dollar was largely unchanged, inching down to $0.7092 after the release from near three-month highs of $0.7097

New Zealands sizzling housing market, which has grown in value more than 50 percent in the last decade, has been a constant headache for the central bank which is worried about high mortgage debt and the risk to banks and households of a sudden downturn. Price growth has eased in recent months, and even edged down on a quarterly basis in the house inflation epicenter of Auckland. (Reporting by Ana Nicolaci da Costa and Charlotte Greenfield)