Australian home buyers have been hit with what Westpac calls a “rate rise surprise”, just as the housing recovery that gathered pace through 2025 was finding its feet.
The bank’s latest Housing Pulse shows sentiment has swung sharply after six months that have seen what Westpac describes as “a dramatic swing in interest rate expectations, from good prospects of a further gradual easing this year to a relatively sudden re-tightening that is set to see most – possibly all – of last year’s cuts reversed.”
Westpac economists Matthew Hassan and Neha Sharma (pictured left to right) say this interest rate “whiplash” is already “reverberating through buyer sentiment”. The February survey shows “prospective buyers, especially across the most affordability-sensitive owner-occupier segments, look to be baulking.” The Westpac–MI ‘time to buy a dwelling’ index dropped 12.8% over the three months to February to 84, well below its long‑run average of 120.
Westpac stresses that “an inadequate supply of new dwellings sits at the heart of Australia’s housing problems”, with long‑running productivity and capacity issues now compounded by a steep rise in construction costs since 2019.
The bank notes detached house construction prices are up about 47% since 2019, with key inputs such as timber and other materials rising 40–50%, and labour productivity slipping as build times have blown out.
Westpac estimates the new‑build pipeline is expanding only slowly, with approvals expected to lift from about 194,500 in 2025 to 200,000 in 2026 and 220,000 in 2027, and completions rising from roughly 177,000 in 2025 to just 190,000 by 2027 – still well short of demand.
Even so, some parts of housing sentiment remain surprisingly upbeat. Westpac notes that “the changed rate outlook has done nothing to dent house price expectations which have instead pushed to new cycle highs.”
Its House Price Expectations Index rose another 0.9% over the three months to February to 173.9, signalling a clear majority of consumers still expect prices to rise over the next year.
Views on jobs are also steady, with the Unemployment Expectations Index roughly back in line with its long‑run average, implying an “about avg” labour market rather than a sharp deterioration. That backdrop is helping support confidence in servicing mortgages despite higher rates.
On the ground, price growth is moderating rather than reversing. Major capital city dwelling values rose 2.1% over the three months to January, down from 3.2% in the prior quarter, and are tracking at about a 1.8% three‑month pace into February, with annual gains near 9.5% and houses still outpacing units.
Investors, APRA, and tax changes in the spotlight
Macro‑prudential policy is also back on the radar, with APRA’s new 20% cap on high debt‑to‑income loans (DTI>6) taking effect in February, although Westpac notes the limit is “far from binding” at current settings.
Investor credit has been running hot – approvals to investors surged about 31.8% over 2025, lifting their share of new lending to 39%, the highest since 2017 – just as the federal government considers trimming the 50% capital gains tax discount and tightening negative gearing in the May Budget.
Critically, Hassan and Sharma stress that “the supply–demand balance remains very tight, extremely so in the ‘hotspot’ markets of Brisbane, Adelaide, and Perth.”
With on‑market stock in these cities equivalent to only around two to two‑and‑a‑half months of sales, Westpac expects prices, turnover, and new dwelling approvals to slow in 2026 – but sees the differences as “marginal rather than dramatic” unless inflation or RBA’s response delivers a bigger shock.
Since Westpac compiled its February Housing Pulse, RBA has reinforced that further increases remain on the table if inflation stays sticky, keeping borrowers on edge. A hotter-than-expected January CPI print, with headline inflation around 3.8% and trimmed mean near 3.4%, has only hardened expectations that RBA may need to move again if price pressures persist. Major lenders, including Westpac and CBA, have already lifted fixed mortgage rates on many products, signalling they see more upside risk to funding costs than a single additional RBA hike.
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