The Reserve Bank governor is relieved that the housing market is showing signs of cooling, especially in Sydney.

In an interview with the Australian Financial Review, Glenn Stevens said it was encouraging that home prices growth has slowed in Sydney and Melbourne.

“I think it had to happen. The pace of growth that we had you can’t keep going at that pace without new stimulus coming into the market from somewhere because the affordability levels just get out of reach for people unless we keep cutting interests rates, which we’re not doing right at the moment, obviously,” he said.

Mr Stevens declined to forecast where home prices would go next, but added he is relieved that tougher lending standards instituted by the Australian Prudential Regulation Authority (APRA) are working.

“I think that’s a better world than the one we were in,” he said.

The RBA governor also remains upbeat about the overall economy, saying that it is handling the “shock” of the end of the mining investment boom.

However he said cuts in government spending were slowing the recovery.

“Of course, the public sector is in the mood to restrain that’s a fifth of demand. So that’s another slight headwind that the economy has to overcome,” he said.