Industrial land prices also peaked in 2007 and have begun to increase since June 2009 in the Colombo municipal area.
"As the interest environment is likely to be benign in 2011 an increase in a Land Price Index could be expected," the regulator said in its financial system stability review for 2010.
"Further, remittance income is expected to be robust during the next year as well and this would also push up the Land Price Indices.
"Accordingly Land Price Indices are unlikely to decline in the near future."
The central bank said that when interest rates are low land prices tend to rise, and they fall when monetary policy is tightened and rates rise.
"When interest rates are low, asset prices tend to inflate. Conversely, when the monetary policy is tightened with raising of interest rates to address high demand pressure due to low interest rates and credit expansion, asset prices tend to fall."
The central bank said that according to its land price indices for residential, commercial and industrial lands, over the last decade all type of land prices have "increased substantially" until 2007.
The bank said there was a connection between remittances and land prices and that when private remittances increase the Residential Price Index also in general increasing.
Price increases in areas outside the Colombo municipality have been significantly sharper, although price levels of these areas still remain well below that of the Colombo municipality.
"During asset price inflation, financial institutions make profit through value gains, whereas demand in the economy increases due to the wealth effect on consumers," the report said."When the asset prices fall, financial markets, investors and financial institutions are adversely affected and such instances may even lead to financial crises and economic downturn."