"The market is going to be tested in accepting this sort of supply. It's not like there is economic growth to support it. Income growth has gone from boom time to the lowest in a number of years and population growth has eased back." Nearly 10,000 apartments will be built in Green Square - one of Sydney's newest suburbs - in the next four years to satisfy investor demand Credit:Jamie Williams Housing and home prices have been the biggest beneficiaries of the central bank's 10 interest-rate cuts since November 2011 to a record low that made mortgages the cheapest they have been in five decades. Economic growth has remained below historical rates and capital spending and confidence have sagged. Some cracks are starting to appear. Auction clearance rates in Sydney dropped to 75 per cent for the week ending September 13 from a peak of over 90 per cent in April, as buyers' tolerance for some of the most expensive property in the world and a median price that touched a record $773,000 cooled, according to property researcher CoreLogic Inc. Nationally, auction clearance rates, used to gauge buyers' demand, have dropped to just over 70 per cent from a high of more than 80 per cent in April. At the same time, demand from investors, responsible for more than half the mortgage commitments since August 2014, a record, is being choked by tighter lending requirements to landlords. Investor loan growth dropped from 29.6 per cent in April to 16.5 per cent in July, the latest government data showed.

Homes are 20 per cent overvalued, according to Goldman Sachs, which is seeing a one in three chance of a recession in Australia in the coming year, according to a note this month, while Barclays Plc puts the overvaluation at 14 per cent. Housing debt among young Australians doubled in real terms between 2002 and 2014. Credit:Louise Kennerley Dwelling prices have climbed 24 per cent across the country in three years to September 1, with Sydney leading with a 46 per cent increase, according to CoreLogic. A surge in supply as economic growth sputters may temper those gains. The economy, trying to navigate a transition from a mining boom, expanded 0.2 per cent in the June quarter, the slowest pace since 2013, while wages climbed 2.3 per cent from a year earlier, matching the weakest pace ever. In the short-term "strong supply growth can create some negative impact on prices," David Cannington, a senior economist at ANZ, said. "With the current headwinds facing the Australian economy and the lack of consumer confidence in particular, a further step up in supply would likely test the depth of demand and face significant challenges in some markets."

Green Square, about 3.5 kilometres south of the Sydney business district, is on course to be the densest suburb in the country. Sprawled across 278 hectares, it will see about 10,000 apartments completed in the next four years, according to the City of Sydney website. They will join almost 59,000 homes across New South Wales state that will begin construction this year, according to the Housing Industry Association. While new-home starts are forecast to decrease from 2016, they will remain above pre-2013 levels, HIA data show. It estimates there will be almost 720,000 housing starts across the country in the four years to 2019 with more than half of that in Sydney and Melbourne. Goldman Sachs economists led by Tim Toohey expects an excess of 75,000 dwellings by 2017 rather than a previously forecast shortfall of 140,000. Besides tighter lending, landlords are facing falling rental yields as the number of homes for rent rises, values increase and population growth slows. Gross rental yields were at a record low in both Sydney and Melbourne in August with a typical dwelling attracting a yield of just over 3 per cent in Australia's two largest cities, according to CoreLogic. Population growth slowed to 1.4 per cent in 2014 and is on course for the slowest growth in nine years, according to Macquarie Group Ltd. "We may be approaching a broad peak in home prices," Kieran Davies, chief economist at Barclays said by phone. "The main uncertainty about the market is tougher regulatory steps to curb investor demand. It's been the driving force lately and there are some signs it is slowing."

Bloomberg