It means overseas developers and individuals will have to build new homes if they want to purchase residential property.
The ban will come into effect early next year, the country's Housing Minister Phil Twyford and Land Information Minister Eugenie Sage said.
“Purchases of homes by offshore speculators push first home buyers and families out of the housing market,” said Mr Twyford.
The legislation is designed to tackle rising property prices in New Zealand, which have fuelled a housing crisis and pushed homelessness rates to the highest in the developed world.
The issue dominated October’s elections, which saw Labour prime minister Jacinda Ardern ending nine years of government by the conservative National Party.
“It will mean, for practical purposes, that foreign buyers will not be able to buy residential property unless they are either increasing the number of residences and then selling them or converting the land to another use. They will need to be able to show that this will have wider benefits to the country,” said Ms Sage.
Property prices have increased 57 per cent over the last decade, as the country has become an attractive destination for the super-rich and for Chinese investors.
Around 40,000 people in New Zealand, or one per cent of the population, are living on the streets or in emergency accommodation, according to a Yale University study published in July.
There will be exceptions to the new rules for those who can prove that their purchase will increase housing supply, for example by increasing the number of residences within a property in order to sell it on afterwards.
There is also an exception for those who can convince the Overseas Investment Office that they intend to live in New Zealand long-term. If they leave the country later, they will have to sell their property.
Australian citizens will be exempt from the new rules.
Discussion of the plans has contributed to a spike in property sales, which jumped 17.8 per cent in November as foreigners looked to buy before the new regime came into effect.
However, some have questioned the move’s effectiveness, with the Real Estate Institute of New Zealand (REINZ) estimating that only 3.8 per cent of buyers are from overseas.
"Given international buyers are such a small part of the market we were interested to understand what impact the Government believes the foreign buyer ban will actually have," said Bindi Norwell, its chief executive.
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