Although record low interest rates have given Sydney's housing market a sugar hit, the Reserve Bank is concerned they aren't having much of a positive impact on the rest of the economy.
The Reserve Bank said that even though interest rates have been at a record low for some time, few home owners have been willing to trade up to larger, more expensive places, or use the extra money to increase spending.
"It may be that although monetary policy is having its usual effects on asset prices, the effect of asset prices on growth of expenditure is less, or at least slower than the historical relationships would suggest," the RBA said in its quarterly monetary policy statement on Friday.
"This may be because households have revised down their expectations of income growth, and therefore may be less willing to carry as much debt as in the past."
The RBA said the reluctance by households to go out and spend is probably sparked by nervousness about employment prospects.
"These possibilities suggest that growth of household expenditure could be somewhat lower, and the saving ratio, higher than forecast."
Sydney has enjoyed double digit annual home price growth in recent years, and is now double that of Melbourne the next strongest market, with other parts of the country falling even further behind.
"One reason is that supply constraints, particularly in Sydney, may limit the extent to which new dwelling investment can satisfy growing demand," the RBA said.
"Another reason is that growth of housing prices outside of Sydney and Melbourne has been relatively subdued and may not yet have responded fully to the very low levels of interest rates."
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