Debt in parts of the agricultural sector also remained high, leaving the sector exposed to a fall in export prices.
In his first financial stability report, Mr Wheeler acknowledged households and companies had generally continued to reduce their reliance on debt.
The central bank was more positive about the New Zealand financial system, partly reflecting measures taken by banks to build up capital buffers in line with the increase in the minimum core funding ratio due at the beginning of next year.
Deputy governor Grant Spencer said banks were well placed to meet the increase in the minimum core funding ratio from 70% to 75% on January 1.
"We are continuing to strengthen the financial system, drawing on the lessons from the global financial crisis."
The bank was implementing the main elements of the Basel III capital adequacy regime, he said.
The Reserve Bank was putting in place a new prudential and licensing regime for the insurance sector, working with banks to pre-position their systems for Open Bank Resolution and reviewing statutory powers for overseeing the payment and settlements systems, Mr Spencer said.
New Zealand Bankers Association chief executive Kirk Hope said the banking sector's core funding ratio was around 84%, well above the Reserve Bank's present minimum ratio of 70%.
That meant banks were sourcing more funds from domestic savings and longer-term wholesale funds and were less reliant on shorter-term overseas funding. Banks were also set to meet the central bank's new minimum level of capital they must hold, which was based on the Basel III levels, Mr Hope said.
While banks were showing an improved return on equity, it remained below levels before the global financial crisis due to the need to raise capital buffers.
"On top of this, interest rates remain at historical lows and competition among banks is high."
The reduction in the average net interest margin to 2.25% in the June quarter recognised the competition among banks, he said.
Mr Wheeler said global economic activity was weak and that affected emerging markets, including China.
The euro area was fragile given the structural issues facing the region. Global growth could be further undermined by substantially tighter fiscal policy in the United States.
Financial market sentiment had improved in recent months, reflecting further monetary easing in the major economies and various measures to support the financially distressed euro area members.
"This has helped New Zealand banks access global funding markets but has also contributed to the strength of the New Zealand dollar," he said.
ASB economist Christine Leung said the financial stability report was not designed to have monetary policy implications. However, the report highlighted the Reserve Bank's concern about the continued high level of household debt and the potential for a sharp correction in house prices.
"The Reserve Bank attributes much of the continued strength of the New Zealand dollar to the more positive growth outlook of the New Zealand economy. This suggests it views the current level of the currency as justified and that it is not appropriate or feasible to lean against it."
The central bank was expected to keep the official cash rate on hold at 2.5% until September of next year, Ms Leung said.
Basel III
• Global banking regulators sealed a deal, in September 2010, to effectively triple the size of the capital reserves the world's banks must hold against losses, in one of the most important reforms to emerge from the financial crisis.
