Money-sink is a term used to denote a game mechanic that helps to control the inflation rate and in-game economy. Without various money-sinks, the developers would have no viable means of introducing money into, or removing excess coin from, the game's economy. This would eventually lead to a complete breakdown of the economic sub-systems. In a game like World of Warcraft, which is primarily driven by a player-created economy, this could have catastrophic effects.
This term is also used somewhat derogatorily by players to denote any in-game sub-system that might be what they consider exorbitantly expensive, from a cost-effectiveness point of view. For instance, personal mounts are quite expensive. Some might call that game mechanic a money-sink. The same generally applies to player-housing in some form or fashion. In many MMORPGS, player-housing is so expensive that the average player could not afford it until later levels, no matter their actual need to have a central port for anchoring alts, entertaining friends, larger vaults, etc.
In general terms, think of anything on the luxury side of one's in-game life as a money-sink.