The Reserve Bank expects bank lending to tighten further in the wake of the royal commission, telling homeowners to expect a "gradual" decline in house prices.
In their most comprehensive comments to date on the effects of the commission's final report, the central bank said while lending standards had been tightened in anticipation of its findings, it was possible that banks could restrict lending conditions further once it is released in February.
Analysts have noted the RBA's cautious language, warning it could become uncomfortable with further tightening leading to a faster decline in the Sydney and Melbourne markets.
"Officials are alert but not alarmed by the decline in dwelling prices," said JP Morgan economist Ben Jarman.
"If the official measures delivered since 2014 pushed officials to the edge of their comfort zone, it is not surprising to see discomfort at the possibility of further tightening to come through legal channels."
In the minutes of their October meeting the Reserve Bank noted "it would be important to monitor the future supply of credit to ensure that economic activity continued to be appropriately supported".
House prices fell by their fastest rate in six years in September, down 6 per cent in Sydney and 4 per cent in Melbourne from the same time last year.
The decline has created a jump in the affordability index according to the Housing Industry Association.
"While it remains the least affordable market in the country – by quite a margin – the [Sydney affordability] index is 9.0 per cent higher than a year earlier which is a significant positive step," said Geordan Murray, HIA's acting principal economist.
"The improvement in affordability has primarily been driven by the declining trend in home prices over the last year."
The Commonwealth Bank's Belinda Allen said policymakers would be watching closely to see if falling house prices start having an impact on consumer spending.
"To date this has not been seen with retail sales data for NSW and Victoria showing no signs of a slowdown," she said.
"Household income growth is another important source of risk for the consumption and inflation outlook."
The bank warned developments in trade policies between the US and China continued to pose significant risks - but that overall growth of above 3 per cent put the economy in a strong position.
It noted above-trend growth in the major advanced economies had led to further absorption of spare capacity in their labour markets. As a result, wages growth had increased noticeably.
The board suggested recent figures showed a similar pattern could be about to emerge for Australian workers frustrated with low wage rises despite an immigration-fuelled jobs growth driving the unemployment rate to six-year lows.
"Employment growth would exceed population growth in coming months," the board said.
Capital Economics chief economist Paul Dales said the weaker housing market, slower consumption growth and tighter lending standards meant he believed the RBA was unlikely to raise the cash rate from its historic low of 1.5 per cent until late 2020.