Two states to face ‘a painful squeeze’ – two others to lead the pack
Westpac's economics team has issued a stark warning that the period of broad-based growth convergence across Australian states is over – with mining states set to surge ahead while Victoria and New South Wales face a painful household squeeze the bank describes in its bulletin as "one of the largest and most prolonged contractions on record, extending back to the early 1990s."
The updated state-level forecast bulletin, released on Sunday by senior economist Pat Bustamante and economist Ryan Wells, flows through the sharper national slowdown Westpac now anticipates for 2026 and into 2027 – driven by the collision of a re-tightening monetary environment with the energy supply shock stemming from the Middle East conflict.
Westpac now expects GDP growth to slow to just 1% in 2026, the unemployment rate to rise towards 5%, and the trimmed mean inflation rate to reach around 4% by year end. The RBA, the bank forecasts, will deliver two additional 25-basis-point rate hikes beyond the widely anticipated 25 basis point move in May – which, based on the current cash rate of 4.1% and an expected May move to 4.35%, implies a rate path potentially reaching 4.85%.
The great divide reopens
For mortgage professionals, the geography of this forecast matters enormously. Westpac draws a sharp line between two groups of states – and the implications for lending volumes, serviceability and property prices fall squarely along that divide.
Queensland and Western Australia are expected to lead the pack. Queensland's gross state product growth is forecast to ease from 2.6% in FY2026 to 1.8% in FY2027, before recovering to 2.0% in FY2028. WA follows a similar path, moderating from 2.4% to 1.8% in FY2027 and then 2.1% in FY2028 according to Westpac's published forecast table. Both states benefit from elevated energy prices delivering income windfalls to their resource sectors, and both continue to see dwelling prices rise.
South Australia also punches above its weight, backed by a substantial pipeline of defence and public infrastructure spending; after an exceptional 3.7% employment growth in FY2026, SA is forecast to ease but remain a relative outperformer.
New South Wales and Victoria, by contrast, are bracing for a sharp deceleration. NSW gross state product growth is forecast to fall from around 1.9% in FY2026 to just 0.8% in FY2027. Victoria tracks alongside it, dropping from around 2.0% to 0.7%. In both states, population growth is set to outstrip gains in both output and consumption – a structural trap that creates sustained per capita pressure.
Victoria: the sharpest adjustment in a generation
The most striking forecast in the entire document concerns Victoria. On Westpac's numbers, consumption per capita in the state is set to record a cumulative decline of around 3.5% over the five years to FY2028. The bank's bulletin states that Victoria "stands out as the only state where consumption per capita is expected to fall below FY2019 levels by FY2028, underscoring the depth and persistence of the adjustment now underway."
The bulletin describes the compounding forces clearly: the post-COVID cost of living squeeze, now intensified by the recent spike in global energy prices, is producing what it characterises as "one of the largest and most prolonged contractions on record, extending back to the early 1990s."
Housing market data is already confirming the pressure. Over the quarter to April 2026, Melbourne house prices fell 1.5% – against a national average increase of 1.6%. Sydney fell 0.9% over the same period.
Westpac's dwelling price forecast table sets Melbourne at just 1% growth for 2025/26 – the equal lowest of any major capital alongside Sydney – before a more meaningful recovery to 5% in 2026/27 as the energy shock fades and monetary policy eventually eases. As MPA reported this week, Sydney and Melbourne are already seeing values fall as the rate tightening cycle bites, with ANZ separately forecasting Melbourne prices to decline 1.7% across 2026 as a whole. The Westpac state bulletin, read alongside that analysis, paints a consistent picture of two cities under material pressure.
For brokers with books concentrated in Melbourne and its suburbs, this confluence of falling prices, tighter serviceability and weakening household demand creates an environment that warrants careful portfolio management.
Rate hikes: the compounding pressure
The rate backdrop underpinning Westpac's state forecasts has evolved rapidly since the start of the year. MPA reported in March 2026 that variable borrowers were bracing for a second consecutive monthly rate hike after the RBA delivered 25-basis-point increases in both February and March, taking the cash rate to 4.10%. Canstar data insights director Sally Tindall noted at the time that borrowers were "staring down the barrel of a potential third hike as soon as May."
Westpac now confirms it expects the RBA to follow through – and then go further, with two additional hikes pencilled in beyond May's anticipated move. That means material ongoing compression of household budgets, particularly in NSW and Victoria where mortgage sizes are largest and households most rate-sensitive. The human dimension of that trajectory is not abstract.
As MPA documented in March 2026, even before the March hike there were already 1.32 million mortgage holders – 24.9% of borrowers – assessed as "at risk" of mortgage stress according to Roy Morgan research. MFAA chief executive Anja Pannek had flagged that borrowers were becoming more cautious, with softening sentiment visible in the MFAA February 2026 Market Sentiment Survey. Peter White, the outgoing chief executive of the FBAA, warned that cost of living increases from the Middle East conflict would add "hundreds of dollars every month to the average household budget."
Against that backdrop, Westpac's forecast of two further hikes beyond May represents a significant additional shock to the most rate-exposed borrower cohorts.
Dwelling price forecasts: a city-by-city map
Westpac's published forecast table provides a clear city-by-city picture. Sydney and Melbourne are both at 1% growth in 2025/26, with Sydney recovering to just 2% in 2026/27 and Melbourne to 5%.
The mining state cities are a different story. Brisbane is forecast at 6% in 2025/26, easing to 3% in 2026/27. Perth comes in at 8% and 5% over the same periods. Adelaide at 5% and 4%. Hobart at 1% and 3%.
For brokers operating across multiple markets, this divergence reinforces the importance of knowing your local economy. The portfolio risks in Melbourne and Sydney are categorically different from those facing clients in Brisbane, Perth and Adelaide.
NSW: employment weakness and an election on the horizon
Westpac's analysis of NSW contains a layer of complexity that mortgage professionals should track. Employment growth in the state, coming off a weak base of 0.6% in FY2026, is forecast to recover only modestly – rising to 1.1% in FY2027 and 1.6% in FY2028, below the national average in each year. The bank notes that while higher costs continue to pressure the state budget, policy settings are likely to remain largely unchanged heading into an election early next year.
In Victoria, Westpac flags the November 2026 state election as a potential drag on private sector investment decisions: "while public demand should provide short term support ahead of the election, there is a risk that post election fiscal consolidation weighs on activity." The combination of consumer weakness, falling dwelling prices and election-related uncertainty
creates an environment where housing market volumes in Victoria may remain subdued through at least the first half of 2027.
Tasmania: the quiet laggard
Tasmania barely registers in any lending growth discussion, and Westpac's forecasts confirm that will not change soon. Population growth of just 0.5% in FY2026, rising slowly to 0.8% in FY2027, is constraining momentum in housing construction and consumer demand. Employment growth is expected to ease from 1.1% in FY2026 to 0.9% in FY2027. Hobart dwelling prices are forecast at 1% for 2025/26, recovering to 3% in 2026/27.
The path back: 2028 and beyond
Westpac's bulletin closes with a sobering bottom line: "The period of state growth convergence seen in 2025 is over. As households are squeezed by higher rates and inflation, state outcomes will diverge sharply, led by the mining states and SA, and dragged by consumption heavy NSW and Vic."
The bank does not forecast a permanent deterioration. As inflation eventually moderates back towards target and the RBA begins to ease – a process Westpac does not expect to begin until 2028 – household spending should recover and growth conditions should gradually converge. But the bank is explicit that "downside risks increase the longer global supply disruptions and geopolitical tensions persist."
For brokers and their clients, the near-term operating environment is one of elevated rates, regional divergence and household balance sheet pressure concentrated in the country's two most populous states. The rate-cut optimism that characterised much of 2025 – when MPA tracked a broad market consensus of further cuts to come – has been fully reversed in just a few months.
