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Lower interest rates will drive a modest improvement in the housing market although continuing affordability and supply-side issues will limit growth, according to Westpac.
The housing market looks “delicately poised” with prices slowing, affordability challenges persisting, and gently warming buyer sentiment after the latest interest rate drop, Westpac research showed.
In the Westpac Housing Pulse report March 2025, the major outlined its forecast for a modest further increase in the housing market upturn, driven by lower interest rates.
However, gains are expected to “remain limited” due to already high property prices and a relatively mild Reserve Bank of Australia (RBA) easing cycle, the big four said.
In February, the RBA made the long-awaited decision to cut the cash rate by 25 bps from 4.35 per cent to 4.10 per cent, but RBA members have expressed caution about the prospect of further policy easing.
Off the back of lower rates, sentiment changes were mixed, Westpac said, with a “thawing” in pessimistic buyer attitudes over the last two years partially offset by “less bullish price expectations”.
Westpac said that historically the housing market had been sensitive to interest rate moves and that early signs suggested a positive shift after the RBA’s February move.
However, the lender said that markets are coming off a cycle that was “surprisingly disconnected from interest rates”.
In February, Australia's property market reversed a shallow downturn, with CoreLogic’s national Home Value Index posting a 0.3 per cent rise.
The increase was subtle but broad-based, with every capital and rest-of-state region except Darwin (-0.1 per cent) and regional Victoria (flat) recording a monthly rise in values.
Dwelling supply remains tight
Looking ahead, Westpac said that housing affordability remains challenged and supply tight.
Affordability is poor in absolute terms almost everywhere, the lender said, while supply side has loosened a little but remains constrained overall.
These factors point to a limited improvement in the wider housing market, Westpac said.
Property prices have rapidly outpaced wage growth over the past five years, although there have been some marginal improvements in affordability recently, according to Domain’s First Home Buyer Report 2025.
Housing supply is a major topic ahead of looming elections, with the government falling behind construction targets and a raft of recent policies announced by political parties aimed at boosting housing supply and affordability.
Master Builders last week raised concerns that supply issues meant Australia would fall short of its 1.2 million new homes target by 166,000 homes over the next five years.
Affordability and rising property prices are also major issues for many voters, with mortgage stress on the rise, particularly for first-time buyers.
Westpac struck a slightly more upbeat tone, noting “tentative signs” of a recovery in new approvals and governments seeking to lift new building but saying that “supply remains difficult to say the least”.
The positive impact on supply from some initiatives may start to be seen over the next two years, Westpac said, but challenges remain “formidable”.
[Related: RBA minutes reveal little appetite for further rate cuts]
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