LEIGH SALES, PRESENTER: There are bad omens for Australia's housing boom with dire predictions for the powerhouse markets in Sydney and Melbourne and hard times already hitting regional areas. It's against that backdrop that Westpac has now raised interest rates. The other big banks are tipped to follow suit and given Australia's massive household debt, that could spell trouble ahead. Conor Duffy reports.

KIM RUSSELL, HOMEOWNER: The main selling points of the house are the amazing view. We have a great view of the bay.

CONOR DUFFY, REPORTER: Kim Russell may have picked the perfect time to sell. She's just listed this house south of Melbourne and forecasters are predicting a red hot market is close to its peak.

KIM RUSSELL: The cost of money is so cheap at the moment that it's the perfect time for people to be buying. Just doesn't feel like anything's coming off the boil at the moment.

CONOR DUFFY: Half a decade of explosive growth has transformed Sydney and Melbourne into some of the world's most expensive cities.

Sellers have been laughing, but it's meant that the debt incurred by buyers has become ever more onerous.

SATYAJIT DAS, FINANCIAL ANALYST: Australians have been playing this Ponzi game of housing where I buy a house and the value goes up and what happens is then I make money by selling it to somebody else and the whole game depends on the buyer always being able to borrow ever larger sums of money and that all depends on incomes and employment, and that side of the economy, the real economy, is looking extremely weak.

CONOR DUFFY: Real estate agents like Robert Simeon aren't supposed to talk down the market, but even he's worried about the correction that's coming.

ROBERT SIMEON, REAL ESTATE AGENT: More particularly Melbourne and Sydney, where they've been sitting at 20 per cent median increases year on year, that's a market that we haven't seen for a long, long time.

CONOR DUFFY: The 30-year real estate veteran believes some outer suburbs will be smashed.

ROBERT SIMEON: Whenever you've had rapid price growth, it's inevitable there's gonna be a correction. That's just the way it is. I mean, the market's always sort themselves out and find a new plateau. Some markets won't be touched. Other markets, it'll be quite horrendous.

CONOR DUFFY: In the cities, falling prices would create new opportunities for those looking to buy and even the Reserve Bank has been concerned about high prices. In some regional cities like Townsville, that correction is well under way.

ANGIE ZIGOMANIS, PROPERTY ANALYST: The Townsville market is suffering. A lot of those regional markets, particularly the ones that have been exposed at various levels to resource sector investment, are now feeling the impact of that downturn in investment.

CONOR DUFFY: David Moyle owns a house and a townhouse. He can't sell either because they're now worth less than the mortgage.

DAVID MOYLE, HOMEOWNER: If the interest rates were to go up significantly, yes, a lot of families will go under. I have allowed myself four years to ride it out and if I can't - if the property market doesn't increase or get better in the next four years, then for me, the harsh reality is I'll take a sizeable loss and I'll have to start again.

CONOR DUFFY: The one-time rapid growth and lifestyle lured him to invest. He never saw the downside coming.

DAVID MOYLE: I would be lying if I'm not sitting back at night-time kind of wondering what the future holds. As I said, you know, if I was 20 years younger, I would've probably said, "Well I got 20 years to work it off." I'm now turning close to 50.

CONOR DUFFY: It's against backdrop that Westpac united the winners and the losers of the property market in outrage. Despite posting an $8 billion profit, the bank's raised interest rates by 20 basis points. One quarter of all residential mortgages are with Westpac.

DAVID MOYLE: It's gonna put tremendous strain on a lot of households and it eventually will be the death knell for a lotta families in Townsville.

CONOR DUFFY: It even united politicians who lined up to kick the bank.

BILL SHORTEN, OPPOSITION LEADER: I don't support what Westpac's done in the slightest. I don't think the case has been made to increase its fees and rates. I think it's an incredibly disappointing decision.

CONOR DUFFY: But the other banks are tipped to follow suit and it's led to speculation the Reserve Bank could cut rates in November.

ANGIE ZIGOMANIS: People are suggesting that if the banks were to increase their variable rate, then the RBA should do a commensurate cut in its cash rate to cause the variable rate to come back to where it was previously.

CONOR DUFFY: Leading financial analyst Satyajit Das fears the banks don't have much room to move.

SATYAJIT DAS: Something like over 50 and probably a higher percentage than even that of banks' loans are somehow tied to housing. And the problem is, if these loans are not paid, then the banking system will have some financial difficulties and this will percolate very quickly in two ways. One is the supply of credit in the economy will tighten and also the cost of that credit will go up.

CONOR DUFFY: He worries falling house prices will be exacerbated by an economy that needs to be transformed.

SATYAJIT DAS: We are basically dependent on international lenders financing us, and given problems elsewhere in the world which are now building up, Australia's extremely vulnerable.

LEIGH SALES: Conor Duffy reporting.