Sir John Key expects rising interest rates to cut more home buyers out of the market and slow house price growth.
"I think house prices have run their race for a wee while," he told Newshub.
The chairman of ANZ Bank, which loaned $99 billion-worth of mortgages in the year to September, did not accept responsibility for an historic increase in prices during the pandemic.
"We've been quite cautious. There are lots of things that make up this, supply is also a factor."
This week Reserve Bank Governor Adrian Orr also said house price growth was unsustainable, and pointed the finger at a lack of land supply, downplaying the central bank's role in increasing asset prices by making it easier to borrow money last year.
"It would be hard to be critical of Adrian Orr," Sir John said. "Making sure the economy was strong was more important than what was happening to house prices [in 2020]."
The former Prime Minister did not want house prices to correct or fall, as that would hurt existing homeowners.
"The best-case scenario always is house prices rise at a moderate to slow rate," he said.
"I don't think the housing market is going to crash or fall back a long way, although if house prices fell by 10 percent it would be called March."
Sir John encouraged borrowers to pay down debt before interest rates rose further, or to fix their loan repayments for a period of time.
"People should be anticipating they'll be facing higher interest rates."
He warned the Reserve Bank to be careful as it looked to implement debt-to-income restrictions, which would cap how much someone could borrow based on how much they earn.
"It has the biggest impact on lowest income borrowers, and particularly first home buyers."
He refused to say what debt-to-income limits ANZ already applied to loan applications internally, but agreed it was between four to six times someone's income.
