Westpac is the latest institution to join the chorus of industry players predicting further instability in Australia's housing market.
In a report for Business Insider Australia, Westpac said home prices can suffer up to 10% decline over the next two years, with particular weakness centred on the cities of Sydney and Melbourne.
The bank cited many factors that are likely to drag home prices down, including the stricter lending standards by the Australian Prudential Regulation Authority.
“APRA’s macroprudential policies are restricting interest-only loans and tighter guidelines for all new loans are slowing house prices and credit growth," the bank said.
While authorities have leaned on raising interest rates to slow the housing market in the past, the market is seeing the same effect as banks independently inflate loan rates and foreign investors leave Australia.
Westpac noted that these headwinds will persist in the foreseeable future as the supply of credit is squeezed and tightened.
With the expected weakness in home prices, the bank expects household spending to also ease.
“This will represent a considerable change in the ‘atmospherics’ around housing wealth and may weigh further on prospects for consumer spending. While the wealth effect was modest in the period of rising house prices it is reasonable that there will be a more marked effect through the downswing," it said.