Westpac forecasts a 7.3% national housing correction as demand weakens

Australia’s housing downturn is expected to deepen before limited supply and low levels of forced selling put a floor under prices, according to Westpac’s latest Housing Pulse.

The bank’s report, released late on Friday, forecasts national dwelling values will fall 7.3 per cent from peak to trough. That would be similar in scale to the national correction recorded during the 2022 interest-rate cycle.

Westpac expects values to decline 6 per cent across the 2026 calendar year, twice the 3 per cent fall it had forecast in June. It is also preparing for a sharper reduction in market activity, with housing turnover now projected to fall about 25 per cent rather than 20 per cent.

The revision does not amount to a prediction of a housing crash. Westpac’s central case is for a broad but uneven correction, with Sydney and Melbourne carrying larger declines than the smaller capitals.

Higher rates are meeting weaker confidence

Westpac head of Australian macro-forecasting Matthew Hassan said the downturn that began early in 2026 had broadened and intensified.

The bank’s housing sentiment measures suggest buyers remain cautious, even though expectations for future house prices have stabilised above the deeply negative readings seen in some previous downturns.

The immediate risk is a period of thin trading. Fewer buyers are willing or able to compete, while owners who do not need to move can delay selling rather than accept a lower price.

That combination can produce volatile results. A small number of discounted sales can influence suburb data when transaction volumes are low, without necessarily meaning every home in the area has lost the same amount.

Westpac said uncertainty around interest rates and housing-related tax changes was adding to the slowdown. Borrowing capacity has also been squeezed as lenders assess applicants at rates above their actual mortgage rate.

Sydney and Melbourne face the largest adjustment

Westpac’s revised forecasts put Sydney’s peak-to-trough decline at 10.4 per cent and Melbourne’s at 8.6 per cent.

The bank expects more moderate corrections in Perth at 4.8 per cent, Brisbane at 4 per cent and Adelaide at 2.1 per cent. The figures measure the expected movement from each market’s high point to its low point, rather than the change within a single calendar year.

Sydney and Melbourne are more sensitive to changes in borrowing capacity because buyers generally need larger loans. Higher-priced houses and discretionary prestige purchases are therefore likely to feel the downturn more sharply than affordable homes attracting owner-occupiers with fewer alternatives.

Conditions can still vary substantially by suburb and property type. A market with rising listings, lengthy selling periods and frequent price reductions gives buyers more leverage than one where quality homes remain scarce.

Limited supply is acting as a buffer

Westpac identified two important restraints on the downturn: there is little evidence of widespread selling pressure, and the supply of housing remains constrained both physically and among properties listed for sale.

Owners who bought before the latest upswing may retain substantial equity even after a decline. Many can also choose not to sell, particularly if they are still employed and meeting repayments.

Australia’s underlying shortage of dwellings is another distinction from downturns associated with excessive construction. Population growth may have slowed, but the pipeline of completed homes remains insufficient in many locations, limiting the scope for a large and sustained surplus of properties.

These buffers matter, but they do not guarantee a quick recovery. Westpac said the run to the end of 2026 was likely to remain challenging while interest-rate expectations, buyer confidence and the economic outlook were unsettled.

Negotiation matters more in a fragmented market

For buyers, the forecast strengthens the case for assessing individual properties rather than trying to identify the exact market bottom. A motivated seller, stale listing or failed auction can create negotiating room that is not reflected in a citywide median.

Sellers need to pay close attention to recent comparable transactions. Quoting against sales from the market peak can result in a long campaign, particularly when buyers believe more stock or lower prices may be coming.

Neither side should assume the national forecast will apply evenly. Markets with scarce listings and affordable price points may remain competitive, while oversupplied or expensive segments can fall more quickly.

What it means for you

• Buyers have more negotiating power, but should keep a financial buffer for possible rate rises or further price falls.
• Sellers should use the newest comparable sales and respond quickly if inspections produce little interest.
• A national 7.3 per cent forecast does not mean every suburb or property will decline by that amount.
• Low listings and limited forced selling are the main factors expected to contain the downturn.