New Zealand's housing market has a 40 percent chance of going bust in the next two years, according to investment bank Goldman Sachs.

The bank has said this country's housing market is the most over-valued and most vulnerable of a group of 10 developed economies, in a report by the Bloomberg news agency.

A housing "bust" is defined as house prices falling 5 percent or more and is based on the ratio of house prices to rents, household incomes, and house prices adjusted for inflation.

"Using an average of these measures, house prices in New Zealand appear the most over-valued, followed by Canada, Sweden, Australia and Norway," the report said.

It noted that residential investment in New Zealand was high, immigration was booming and driving the construction sector, while households were also benefiting from low interest rates.

"We see reason for some concern about house-price developments in the small open G10 economies," it said. "Prices do appear overvalued and credit growth has been high - traditional warning signs of real house-price declines."

Growth in house prices has been slowing over the past year after the Reserve Bank has tightened bank lending rules, forcing home buyers and property investors to have bigger deposits, and limiting the amount of higher risk loans that banks could finance.

Quotable Value's national house price index has slowed from more than 14 percent growth in the middle of last year to 11 percent last month. The overheated Auckland market has halved to about 8 percent annual growth rate.

Last week, the Reserve Bank said it expected the more strict lending rules would continue to help to slow housing inflation to about 5 percent over the next couple of years.

The Goldman Sachs report did note that its house price predictor has "a few key drawbacks", including that it predicted housing busts too often.

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