Australia's housing market is cooling faster than Westpac anticipated. The bank's chief economist says that does not mean a crash is coming.
In a Westpac IQ note published 7 August 2026, Luci Ellis, chief economist at Westpac Group, used the term "air pocket" to describe the current phase. She pointed to the dual effect of higher interest rates and the May budget's tax changes.
Ellis put the position plainly in the note. ‘Tight monetary policy plus tax changes add up to a powerful combination weighing on the housing market. Credit remains readily available, but demand is weak.’
Prices have declined across most capital cities over the latest month. That pace of softening is running ahead of Westpac's own late-June forecasts.
Home loan credit enquiries have fallen back to late-2022 levels. Industry data put the monthly rate of decline at around 4%.
Clearance rates at Sydney and Melbourne auctions have dropped to previous cycle lows. Sales volumes have fallen sharply across most states. New listings are easing too but more slowly than sales are contracting. That gap is pushing total stock on market higher.
The result is a shift in bargaining power. Buyers now have more choice and less competition than at any point in recent years. Ellis noted that the picture varies considerably across cities. Local conditions will differ.
For brokers tracking the mid-year Australian housing market outlook, the Westpac reading is consistent with a broader softening visible since the RBA's third consecutive hike.
Despite the softer reading, Ellis urged perspective. Outside Melbourne, prices climbed sharply over recent years. Even after a moderate pullback, values would remain well above earlier levels.
The Reserve Bank of Australia (RBA) has noted that very few borrowers are in negative equity – where a home's loan balance exceeds its value. Ellis said a moderate price correction would not push many households into that position.
Employment remains the key structural buffer. Unemployment is expected to rise but from slower hiring, not widespread job losses. Borrowers who keep their jobs are unlikely to become forced sellers.
Under the budget's tax rules, existing investors face little financial reason to exit. Owner-occupiers are unlikely to sell into a falling market. Westpac expects a prolonged stretch of low turnover as a result. A wave of distressed sales is not the base case.
At its August meeting, the RBA is expected to hold the cash rate at 4.35%. Ellis said the bank's remit covers inflation and employment, not housing prices. In her view, the RBA was never likely to react strongly to a fourth housing downturn in a decade.
Most market players have been tracking the RBA's next move ahead of August, with the hold outcome now broadly anticipated.
Westpac has also revised its rate path. Two hikes previously in its forecasts have been removed.
Rate cuts are now projected to begin in August 2027. That is considerably earlier than the February 2028 start date Westpac had previously forecast. The revised timeline brightens the 2027 outlook and supports the case that current weakness is temporary.
Westpac will formally update its housing price forecasts after next week's RBA decision. Ellis said the near-term direction is softness through 2026. A prolonged downturn into 2027 is not the base case.
With the Australian housing market now showing buyer conditions across most cities, clients who have been sitting on the sidelines may find the coming months more favourable. Brokers heading into the spring selling season should frame it accordingly: an air pocket, not a crash.
