The bank had previously predicted prices would rise 10% in 2021 and again in 2022 but changed its tune today.
With the market booming, Westpac said much of this growth would be seen this year, before slowing to grow by 5% next year.
Westpac economists Bill Evans and Matthew Hassan said the housing market had started the year well ahead of expectations, and the rapid pace is unlikely to fade anytime soon.
"Some moderation is likely, particularly as affordability becomes more stretched for owner occupiers," they said.
"However, a sudden loss of momentum near term looks unlikely, particularly with markets tight, price expectations bullish, investor activity showing signs of picking up and highly stimulatory financial conditions still firmly in place."
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The two economists said a large factor in the boom slowing next year would be intervention from the Australian Prudential Regulation Authority (APRA).
"The 20% ‘limit’ reflects two key views: that deteriorating affordability will become a more binding constraint for owner occupiers as prices rise; and that regulators will intervene in the market in 2022 as investor activity lifts and credit growth reaches uncomfortable levels."
According to CoreLogic, home values rose 2.8% in March, the fastest rate of growth in 32 years, with Sydney's 3.7% increase leading the way.
Westpac said much of this growth was being driven by owner occupiers, but investor activity was likely to ramp up as the year progressed, leading to further price increases.
"Deteriorating affordability will work to restrain owner occupier demand and slow price gains. If investors were to remain dormant that would likely be sufficient to cool the market," Mr Evans and Hassan said.
"However, investors are unlikely to stay away given the momentum around prices – actual and expected."
Westpac is the second most optimistic of the big four when it comes to the property price outlook for 2021.
Here's what the others predicted.
CommBank house price forecast 2021
Commonwealth Bank (CBA) forecast in February property prices would rise by 8% in 2021 and 6% in 2022, with house prices to rise 16% in that time and unit prices by 9%.
In March, CEO Matt Comyn revised that estimate at a Parliamentary hearing in Canberra, saying 2021 would now see an increase of 10% - a minor adjustment.
CBA Head of Australian Economics Gareth Aird said a number of factors made it clear the property market was in for a bumper year.
"New lending has lifted sharply. Dwelling prices are rising briskly in most capital cities. And turnover is up significantly on year-ago levels," Mr Aird said.
"Near term indicators of momentum suggest conditions will further strengthen. Auction clearance rates are sitting at levels consistent with double-digit dwelling price growth.
ANZ house price forecast 2021
ANZ predicted in March property prices would rise by 17% this year, with Perth and Sydney set to be the best performers at 19%.
ANZ forecast at the end of last year that prices would rise by 9% in 2021, but ANZ senior economist Felicity Emmet said the revision was made due to demand outstripping supply so heavily.
"The strength in sentiment is putting upward pressure on prices, with low stock levels adding to the fear of missing out (FOMO) sentiment emerging in the market gains of around 17% across the capital cities (up from 9% previously) in 2021," Ms Emmet said.
"With interest rates the primary driver of price gains, we see strength across all capital city markets."
NAB house price forecast 2021
NAB Executive Home Ownership Andy Kerr told Savings.com.au in February the lender expected property prices to rise 10% this year.
“NAB is currently forecasting house price growth of around 10% for Australia’s capitals in 2021, with apartment price growth likely to be a bit more subdued, particularly in Melbourne and Sydney," Mr Kerr said.
Image source: Westpac
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