Three rate hikes since February. That is what the RBA has delivered so far in 2026, taking the cash rate back to 4.35%. Now Westpac has warned of a fourth in August, with chief economist Luci Ellis stating after the June pause that her team's "conviction that the RBA will increase the cash rate in August has increased." Westpac is the only big four bank forecasting more than one further hike, targeting a peak cash rate of 4.85%, a 17-year high. Melbourne is showing the deepest cracks.
Values sit 2.9% below their cyclical peak. Sales are down 14.2% year-on-year. Here is what is happening and what you can do about it.
How We Got Here
The cash rate sat at 4.35% from November 2023 through early 2025, then the RBA cut three times, giving Melbourne a brief recovery: clearance rates climbed into the low 70s and investor enquiries surged 87% year-on-year.
February 2026 shifted the ground. The RBA lifted rates to 3.85% in a unanimous vote, the first hike since 2023. Governor Michele Bullock told the press she was "not sure" whether the bank was entering a tightening cycle.
A second hike in March. A third in May to 4.35%. Through this period, Westpac's economics team had already flagged a far more aggressive path than its peers. In March, Westpac forecast three further hikes (May, June, and August) taking the cash rate to 4.85%. After the May hike and RBA guidance, Westpac revised the timing to August and September. When the RBA held in June, Ellis said her conviction on the August hike had only strengthened. Across the other big four banks, CBA, NAB, and ANZ all expected only one more hike, making Westpac the outlier. The 2022 to 2023 cycle delivered 13 rises totalling 425 basis points. That memory is fresh.
Melbourne's Market by the Numbers
Melbourne dwelling values fell 0.8% in May 2026 alone, the second-largest decline of any capital behind Sydney's 0.9% drop. The national index was flat at 0.0%. The Melbourne market sits 2.9% below its cyclical high.
Home sales are down 14.2% year-on-year. National auction clearance rates slumped to 57% by late March 2026, down from the low 70s in October 2025. Melbourne clearance rates settled in the low-to-mid 60% range by April 2026, with private treaty now dominating.
At end-2025 the median dwelling price was $827,117: houses at $981,165, units at $640,391. Melbourne houses remain roughly $557,000 cheaper than Sydney.
The Borrowing Capacity Squeeze
Each 0.25 percentage point rate rise cuts borrowing capacity by roughly 2.3 to 2.5%. For a Melbourne couple earning $180,000 combined, their maximum loan drops from about $925,000 to around $902,000 per hike, a $23,000 hit each time.
Three hikes have already cost them roughly $60,000 to $70,000 in borrowing power. A fourth in August pushes that toward $80,000 to $95,000, enough to shift which suburbs they can target and enough to reduce competition at auctions, where fewer qualified bidders means softer results.
First home buyers felt it first. Their numbers fell by a quarter from early February to early March 2026. Loan Market data showed FHBs dropped from two-thirds of broker customers to just over one-third.
It's Not Just Rates
The 12 May federal budget revealed changes to negative gearing and CGT: investors buying after that date cannot negatively gear beyond mid-2027, except for new builds. Treasury forecasts a 2 percentage point drag on prices over two years; AMP's Shane Oliver forecasts a 5% hit over 12 months. A Senate inquiry is weighing cutting the CGT discount from 50% to 25%, which at the top marginal rate means roughly $60,000 extra tax on a $500,000 gain.
Victoria adds its own headwinds. Property taxes now account for over 40% of state government revenue, up from 18% in 2014. With a state election approaching, the policy outlook is uncertain.
Alba director Thomas Mifsud describes the investor response as staged: initial reactionary calls, then portfolio reassessment over 12 to 18 months. Cate Bakos warns that disincentivising investors risks removing rental stock "when we don't have enough homes to house renters." The properties investors offload, smaller houses and apartments, overlap with what first home buyers target.
At the same time, supply-side fundamentals remain tight. Net overseas migration has added roughly one million more people over four years, with 295,000 this financial year and 245,000 next. Building approvals are up 17% since June 2024, adding 219,000 new homes, but the national vacancy rate sits at just 1.5%, in line with record lows. No material supply response is expected in 2026. That scarcity provides a floor beneath prices, even as demand-side headwinds accumulate.
Sentiment Is the Real Problem
Cotality Research Director Tim Lawless put it bluntly: "Melbourne's challenge is not affordability: it is confidence in the state's economy and interest rates."
APRA requires lenders to assess borrowers at 3 percentage points above the actual loan rate. After four hikes, a buyer approved at 4.35% was stress-tested at roughly 7.35%. Wakelin Director Jarrod McCabe argues a single rise changes little for someone who has cleared that hurdle. What matters is whether this is a "one-off recalibration" or a sustained tightening cycle. McCabe points to the 2022 to 2023 cycle as the emotional benchmark: 13 consecutive rises left what he calls "psychological scars" on buyers who could not keep up, and those scars are still shaping behaviour today.
The RBA's hawkish tone alone drove Melbourne clearance rates from 72% in October 2025 to 65.6% by December 2025, before any rate hike occurred.
SQM Research's Louis Christopher says "the national housing market has turned, and the downturn is now broadening." LGT's Scott Haslem: "the ledger appears dominated by negative headwinds."
The Case for Melbourne Being Undervalued
There is a counter-narrative. Melbourne's 5-year growth of roughly 15% compares with 80 to 90% in Brisbane, Perth, and Adelaide. Rental yields have surpassed Brisbane and Adelaide for the first time in Cotality series history.
The Westpac Melbourne Institute's "time to buy a dwelling" index surged 31.5% for Victoria in late 2024. Wakelin recorded that 87% surge in investor enquiries during 2025.
Supply provides a floor: national vacancy at 1.5%, in line with record lows. No material supply response is expected in 2026.
The bull case: Melbourne is near a cyclical bottom. The bear case: rate headwinds delay recovery long enough that buyers lose patience.
The Wildcard: Jobs and Forced Sales
Westpac views the surge in youth unemployment, to 11.1% in April, as a "leading indicator" for the broader jobs market. The bank warning of another hike is also flagging labour market deterioration.
The RBA's financial stability review tells a revealing story. The share of mortgaged owner-occupiers spending more than they earn fell sharply from 4.5% in 2023 to 1.3%, a sign of how far household finances repaired during the rate-cut period. But that trend is now reversing: the RBA forecasts the share will rise above 1.6% by end-2026, pushing some households toward "difficult and disruptive" decisions.
Against that, resellers' gains hit a record $365,000 in December 2025, with more than 95% selling at a profit. The tension, equity on one side and rising unemployment on the other, will determine whether this stays a correction or becomes something worse. Most forecasters expect a correction, not a crash.
What the August Decision Means for You
Westpac's August warning is the fourth data point in a pattern that has reshaped Melbourne's market this year. Two realities compete: the market is declining and sentiment is fragile, but Melbourne is historically cheap relative to other capitals and supply remains tight.
This is a buyer's market. For buyers, that means knowing your borrowing capacity under multiple rate scenarios, including the 4.85% peak Westpac forecasts. Secure employment and a long horizon matter more than ever. For sellers, pricing realistically is essential: clearance rates in the low-to-mid 60s mean most properties pass in or sell after negotiation, and overpricing in a softening market is expensive. Private treaty now dominates, and vendors should plan their campaign around that reality rather than banking on auction-day competition.
Both buyers and sellers should watch the labour market as the true lead indicator for what comes next. Westpac is tracking youth unemployment (11.1%) not because it directly drives property sales but because it signals where the broader market is heading. If employment holds, the floor provided by tight supply and substantial homeowner equity likely keeps this a correction. If it cracks, the calculus changes.
The August decision matters, but what matters more is whether it is a final recalibration or the midpoint of a longer tightening cycle. Luci Ellis expects rate cuts from August 2027, roughly one per quarter. That is the timeline buyers and sellers are operating within.
Frequently Asked Questions
How much will my borrowing capacity drop if the RBA raises rates in August 2026?
Each 0.25 percentage point rise reduces borrowing capacity by roughly 2.3 to 2.5%. For a couple earning $180,000 combined, that is about $21,000 to $23,000 less per hike. After three hikes in 2026, a fourth in August would bring the total reduction to around $80,000 to $95,000. The exact figure depends on your lender and circumstances. Speak to a broker for a personalised assessment.
What is Westpac predicting for the August 2026 RBA meeting?
Westpac chief economist Luci Ellis has been flagging an August hike since March 2026, when the bank forecast three further hikes taking the cash rate to 4.85%. After the May hike, Westpac revised the timing to August and September. Following the RBA's June pause, Ellis stated her conviction on an August hike "has increased". Westpac is the only big four bank forecasting more than one further hike. The bank expects rate cuts to begin from August 2027.
How far have Melbourne property prices fallen in 2026?
Melbourne dwelling values fell 0.8% in May 2026 and sit 2.9% below the market's cyclical high. Home sales are down 14.2% year-on-year, and the median dwelling price at end-2025 was $827,117. National auction clearance rates slumped to 57% by late March 2026. Most forecasters describe this as a correction, not a crash: the 2022 to 2023 cycle delivered 13 rate rises without a housing collapse.
Does the APRA serviceability buffer protect me from rate rises?
APRA requires lenders to assess borrowers at 3 percentage points above the actual loan rate. After four hikes, a buyer approved at 4.35% was stress-tested at roughly 7.35%. Wakelin's Jarrod McCabe argues the real impact is psychological, not mathematical: most active buyers have already cleared the buffer. However, the 2022 to 2023 tightening cycle left what McCabe calls "psychological scars" that are shaping buyer caution today. Buyers approved earlier at lower rates could struggle to re-qualify under current tests.
What effect have the 2026 federal budget tax changes had on Melbourne property?
The 12 May budget revealed investors buying after that date cannot negatively gear beyond mid-2027, except for new builds. Treasury estimates a 2 percentage point drag on prices over two years; AMP's Shane Oliver forecasts a 5% hit over 12 months. A Senate inquiry is considering cutting the CGT discount from 50% to 25%, which at the top marginal rate means roughly $60,000 extra tax on a $500,000 gain. These changes compound the rate-hike pressure on Melbourne's investor-heavy market.
Are Melbourne auction clearance rates still falling?
National auction clearance rates slumped to 57% by late March 2026, down from the low 70s in October 2025. Melbourne settled in the low-to-mid 60% range by April 2026, with private treaty now dominating. Clearance rates in the 50s and low 60s typically correlate with flat or declining prices: 60% is considered the threshold between a rising and falling market.
Is now a good time to buy property in Melbourne?
It depends on your timeline. The bull case: Melbourne's 5-year growth of roughly 15% compares with 80 to 90% in Brisbane, Perth, and Adelaide; rental yields have surpassed both for the first time on record; houses remain $557,000 cheaper than Sydney. The bear case: rates may not have peaked, tax changes add downward pressure, and sentiment is fragile. Buyers with secure employment and a long horizon may find value. Short-term gains are unlikely in the current environment.
Will investors leave the Melbourne market because of rate rises and tax changes?
Wakelin recorded an 87% surge in Melbourne investor enquiries in 2025. Most existing investors will not sell immediately; Alba director Thomas Mifsud describes a staged response of initial calls then portfolio reassessment over 12 to 18 months. Cate Bakos warns that disincentivising investors risks removing rental stock when we do not have enough homes. The properties investors offload, smaller houses and apartments, overlap with first home buyer territory.
How does the Victorian state election in 2026 affect the property market?
Victoria's property taxes now account for over 40% of state revenue, up from 18% in 2014. An approaching state election adds policy uncertainty: potential changes to land tax, rental regulations, or first home buyer incentives could shift the calculus for investors and owner-occupiers alike, with Melbourne already absorbing rate rises and federal tax changes.
Could rising unemployment trigger forced property sales in Melbourne?
The RBA's financial stability review shows the share of mortgaged owner-occupiers spending more than they earn fell from 4.5% in 2023 to 1.3%, but is forecast to rise above 1.6% by end-2026. Westpac flagged the surge in youth unemployment to 11.1% as a leading indicator. However, most homeowners hold substantial equity: resellers' gains hit a record $365,000 in December 2025, with more than 95% selling at a profit, making forced sales less likely than in previous downturns.
What are the lending criteria for first home buyers in 2026?
The First Home Buyer Guarantee allows eligible buyers to purchase with a 5% deposit on properties under $950,000 in Melbourne, pulling forward demand in the sub-$950,000 apartment market. However, FHBs were the first to pull back after the February rise: numbers fell by a quarter and Loan Market data shows they dropped from two-thirds of broker customers to just over one-third. Serviceability buffers apply, and each rate rise shrinks the maximum loan.
How do Melbourne rental yields compare to other capital cities right now?
Melbourne rental yields have surpassed Brisbane and Adelaide for the first time in Cotality series history. This reflects softening purchase prices and tight vacancy at a national 1.5%. Melbourne recorded the softest rental growth of any capital in 2025 at roughly 2.9%. For investors, the yield improvement is a bright spot, though it sits in tension with the capital growth outlook.