Australian mortgage brokers head into 2026 with an economy that finished 2025 strongly, but higher mortgage rates and rising energy costs set to squeeze borrowing capacity for first-home buyers and property investors alike.
Westpac economists note that “The Australian economy ended 2025 on a strong note, growing by 0.8%qtr in Q4 and 2.6%yr.” That momentum, however, is expected to fade as rate hikes and an energy shock filter through households and businesses.
Westpac’s base case has the Reserve Bank delivering another 25-basis-point hike in May, returning the cash rate to 4.35%. The bank says “we do not expect the RBA to unwind recent interest rate hikes until late 2027”.
That signals a prolonged period of elevated mortgage rates for households and businesses.
This national backdrop is playing out differently across the states. The report shows a broad-based pick-up in private sector activity across the states in 2025, led by South Australia, Western Australia, and Queensland.
Strong population gains and outperformance in house prices in WA, Qld, and SA are already generating a visible housing supply response, with residential construction growth running at high single-digit rates in those markets.
Queensland and Western Australia stand out with strong private demand, robust household spending and sizeable pipelines of major projects, while South Australia is combining above-trend growth with relatively low inflation.
By contrast, Victoria’s recovery looks more fragile, with per capita growth only just turning positive and unemployment above the national rate. NSW is somewhat more exposed to higher interest rates and external energy shocks, and Tasmania is growing below trend, relying heavily on private demand against a softer labour market.
Higher fuel and energy costs are expected to trim real household income growth through 2026, while savings buffers, though generally improved, remain weaker in Victoria.
Together, softer real income growth and uneven savings buffers point to tighter household budgets in the near term.
On the cost side, the report highlights that construction price inflation eased in 2025, but from a very high base.
Across the sector, output prices rose just 2.7% last year, yet “prices have risen by nearly a third since 2019,” according to Westpac’s housing and construction analysis. Residential building has seen the sharpest cumulative increase, reflecting persistent pressures in key materials such as timber and concrete.
The latest Middle East–driven oil shock is expected to push up freight and a range of energy-intensive inputs in 2026, even if domestic electricity prices stay contained.
Persistent cost pressures will keep build and renovation budgets under strain for borrowers and lenders alike.
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