The current decline in residential property values may not develop into a prolonged downturn if Australia’s persistent shortage of housing continues to place pressure on the market. Westpac expects the correction to eventually give way to renewed price growth, with insufficient housing supply remaining an important influence on its longer-term outlook.
Westpac CEO Anthony Miller expects the present correction to bottom at approximately 7%. The bank then forecasts national property prices returning to growth, increasing by around 3% in 2027 before accelerating to approximately 8% in 2028.
Those forecasts indicate a market moving through distinct stages rather than experiencing a permanent change in direction. In the immediate period, higher interest rates and recent property tax changes have weakened borrowing demand. Over the longer term, however, Westpac expects the underlying imbalance between the number of homes required and the number being delivered to reassert itself.
The reduction in mortgage applications provides a clear indication of the current slowdown. Westpac has recorded a 26% fall in investor mortgage applications since the Federal Budget. First-home buyer applications have fallen even more sharply, declining by 30%.
These figures demonstrate how quickly financing conditions and policy changes can affect purchasing activity. Investors reconsidering the economics of property ownership may postpone acquisitions, while first-home buyers can become more cautious when higher repayments reduce borrowing capacity or make ownership less affordable.
Lower mortgage demand can translate into reduced competition for properties, contributing to softer prices. Yet weaker buyer activity does not increase the physical number of homes available. This distinction sits at the centre of Westpac’s longer-term view of the market.
The fundamental supply problem remains unresolved. The national target of delivering 1.2 million additional dwellings is already expected to be achieved later than originally planned. Delays in adding new homes mean population and household demand can continue to place pressure on the existing housing stock.
Housing shortages can persist even during a price correction. Property values reflect both demand and supply, but demand itself is influenced by several factors, including borrowing capacity, confidence and population growth. Higher interest rates can temporarily reduce the number of people able or willing to purchase, while insufficient construction continues in the background.
If borrowing conditions eventually become more supportive and confidence improves, buyers who delayed purchasing can return to a market that still has limited housing availability. Under that scenario, demand can recover faster than supply because creating additional dwellings requires substantially more time than obtaining finance and re-entering the property market.
That lag is important. A change in buyer confidence can occur relatively quickly, while new housing requires land, approvals, financing, labour, materials and construction. Even where governments and industry agree that more supply is required, delivering homes at scale can take years.
Westpac’s forecast of approximately 3% national price growth in 2027 followed by around 8% in 2028 reflects its expectation that the current weakness will eventually be overtaken by those longer-term supply pressures. Forecasts are inherently uncertain, and actual results will depend on future interest rates, economic conditions, construction activity and buyer demand.
The 26% decline in investor mortgage applications and 30% fall among first-home buyers nevertheless show that the immediate market is operating under very different conditions. Reduced finance demand can provide existing buyers with more negotiating room and can limit the price competition seen during stronger phases of the cycle.
For first-home buyers, lower competition does not automatically mean purchasing has become easy. Higher borrowing costs can offset some of the benefit created by softer prices. A home that costs less to purchase may still require substantial monthly repayments if mortgage rates remain elevated.
Investors face a different calculation. Recent property tax changes have altered the financial considerations surrounding residential investment, while borrowing costs and rental returns continue to influence decisions. A sharp fall in investor mortgage applications suggests many are reassessing those factors rather than proceeding under previous assumptions.
Supply remains the common issue connecting these different parts of the market. If fewer buyers are competing today but housing construction continues to fall short of underlying requirements, the imbalance can remain hidden until demand begins strengthening again.
This is why the current downturn can be viewed as cyclical rather than necessarily structural. Prices can decline while borrowing conditions are restrictive and confidence is weaker, even though the longer-term shortage of dwellings remains unresolved.
For the market, much will depend on whether housing construction can improve before buyer demand recovers more substantially. A meaningful increase in supply could reduce some of the future pressure. Continued delays in delivering the 1.2 million-home target would leave the market more exposed to renewed competition when financial conditions become more favourable.
Westpac’s outlook therefore presents two contrasting periods: near-term weakness driven by borrowing conditions and changed investor behaviour, followed by potential renewed growth as housing scarcity becomes more influential. Whether prices follow the forecast path remains to be seen, but the underlying shortage ensures supply will remain central to the property market outlook.
