The decision by two major banks not to lend to foreign buyers has left the Government alone with its head in the sand, Labour says.
Westpac and ANZ's home loan restrictions follow similar moves in Australia.
Westpac New Zealand will no longer lend to non-resident borrowers with overseas income.
Borrowers on temporary resident visas will only be accepted if they have both a New Zealand address and a New Zealand-based income.
ANZ has also announced rules that will effectively shut out foreign borrowers, including restricting lending to owner-occupied properties.
The restrictions don't affect Kiwis living abroad and buying with overseas income.
Labour housing spokesman Phil Twyford said the banking system recognised non-resident, foreign buyers as a particular risk.
"The banks are taking seriously the risk that they identify, while the New Zealand Government has its head in the sand."
Housing Minister Nick Smith said the decision was Westpac's to make. He was not worried about the move or any signal it sent about risks in the housing market.
"The evidence is that foreign buyers are a negligible impact on the housing market."
A Westpac spokeswoman said the restrictions would reduce risk.
Bruce Patten, of mortgage brokerage Loan Market, said he expected more banks to follow the pair's lead. In Australia, the introduction of tougher rules for foreign buyers by some banks saw a flood of loan applications to other lenders. One, Bendigo Bank, said the inquiries exceeded its risk appetite.
Patten said most non-resident, overseas-based buyers would take out New Zealand bank loans, unless they paid cash or had somebody here buy the property for them.
Land Information New Zealand (Linz) data shows 474 out 11,955 houses sold between January and March went to non-residents.
Officials warned that there were limitations to the data, and Labour has dismissed it as worthless.
Last year, Labour sparked an uproar with data showing that up to 40 per cent of Auckland houses were sold to people of Chinese descent, who make up only 10 per cent of the city's population.
The estimate was based on people with Chinese-sounding surnames.
Meanwhile, the Reserve Bank yesterday left the official cash rate at 2.25 per cent, with Governor Graeme Wheeler flagging rising house prices as a risk to financial stability.
He said investors - who account for 46 per cent of Auckland property sales - could soon be targeted by new loan to value lending rules. The loan to value ratio is the amount of a loan compared with the property value.
Last November, the Reserve Bank tightened those rules to rein in Auckland investors, ensuring banks demand 30 per cent deposits for a mortgage secured against an investment property.
