SYDNEY • A home-building frenzy that is shoring up Australia's economy as the mining boom ends may also be what finally takes the steam out of one of the world's most expensive property markets.
The case in point: Green Square.
Nearly 10,000 apartments will be built in one of Sydney's newest suburbs in the next four years to satisfy investor demand, which has already sent property prices in the city to its highest.
It will also add to the record 213,000 new home starts across the country amid slowing population and economic growth, prompting Goldman Sachs Group to warn of a supply glut by 2017.
"There is a tsunami of home supply coming," said Mr Nigel Stapledon, head of real estate research at the University of New South Wales Business School and former chief economist at Westpac Banking.
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.
MR DAVID CANNINGTON, senior economist at Australia and New Zealand Banking Group, on the negative impact of supply growth
"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."
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 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 about 73 per cent for the week ended Sept 20, 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 A$773,000 (S$778,000) cooled.
The measure is at the lowest since November.
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 last year, 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 sees a one in three chance of a recession in Australia in the coming year, according to a note this month, while Barclays puts the overvaluation at 14 per cent.
Prices have climbed 24 per cent across the country in three years to Sept 1, with Sydney leading with a 46 per cent rise, said CoreLogic.
Reserve Bank of Australia Governor Glenn Stevens said in June that Sydney home prices were "crazy", while Treasury Secretary John Fraser has called it a "bubble".
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", Mr David Cannington, a senior economist at Australia and New Zealand Banking Group, 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." BLOOMBERG