Reserve Bank Governor Philip Lowe expects the Australian housing market to continue its decline, but doesn't believe it has the capacity to derail the economy.
External global developments would still have the biggest sway on the Australian economy, Mr Lowe said during a National Press Club address in Sydney.
He said a stumble by China could "hurt us a lot," if it were not handled correctly.
"If we are to have a significant downturn in the economy I think catalyst would be something going wrong in the global economy," Mr Lowe said.
However, in the list of domestic factors influencing the Australian economy, the housing market was at the top of the pile, he said.
"Of the domestic source of risk, the housing market consumption exodus is the more prominent one but not more prominent than the overseas risks."
Mr Lowe said while the housing downturn in Sydney and Melbourne wasn't "the correction we had to have," he believed it was inevitable.
"I think it is likely that we will see further price declines in Sydney," he said, adding he believed the fall was a "manageable correction".
"It is not being driven by higher unemployment or higher interest rates."
"It is being driven by an increase in supply in, or a lagged increase in, supply and response to faster population growth."
The governor said both the global and Australian economy are due to grow reasonably well in the coming two years, despite some looming global risks.
But the strength of Australia's housing market and how much people are splashing their cash will be the greatest sources of uncertainty in the local economy in the coming years.
Mr Lowe is not certain what impact the correction will have on household consumption.
But the RBA does believe things are looking manageable, on the back of big hikes in prices in recent years.
"Most households do not change their consumption in response to short-term changes in their wealth," he said.
Mr Lowe flagged a possible cut to Australia's cash rate if income and spending growth were weaker than expected, before suggesting it was equally as possible the rate could go up.
"Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down," he said.
"Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios.
"Today, the probabilities appear to be more evenly balanced."
Either way, Mr Lowe doesn't expect to see a change any time soon.
"It does not see a strong case for a near-term change in the cash rate," he said.
The Aussie dollar lost a week's worth of gains following Mr Lowe's speech, the currency dropping 0.86 per cent from 72.42 US cents at 1210 AEDT, to 71.80 US cents in about 30 minutes.
His comments come after the central bank kept the cash rate at its record low of 1.5 per cent on Monday, as widely anticipated, meaning it has not shifted in 30 months.
