A fall in home prices is making financial conditions in Australia more restrictive, according to a senior central bank official, helping efforts to reduce aggregate demand and cool the economy.

"The housing market appears to have softened by somewhat more than the recent increase in interest rates would imply, contributing to financial conditions potentially being a bit more restrictive than otherwise," Reserve Bank Assistant Governor Chris Kent said in Sydney on Thursday.

This softening in the housing sector is seen as an additional factor tightening financial conditions beyond what interest rate hikes alone would achieve.

The comments highlight the interplay between housing market dynamics and broader economic policy, suggesting that declining property values could amplify the impact of already elevated borrowing costs.