The housing industry will begin recovering with an increase in housing starts by the 2009/10 financial year, said Housing Industry Association (HIA) chief economist Harley Dale.
A "modest" return to form in the industry would be the result of a fiscal stimulus and large interest rate reductions, said Dale.
"The First Home Owner Boost, mortgage rates at a 40-year low and the housing components of the federal government's Nation Building and Jobs Plan have the capacity to deliver a moderate recovery in residential activity," he said.
The HIA said housing starts would fall by 17% in 2008/09 to a level of 132,190. The forecast predicts they would then grow by 13% in 2009/10 and by a further 6% in the following year, reaching a level of 158,100 starts.
For now, the number of new homes has stalled, however, according to the HIA, which is the nation's largest building association. Slow sales and credit rationing have resulted in an estimated 34,000 new homes on hold.
A nationwide survey of 1,300 HIA members found that nearly 50% had approved residential projects that had not been started or completed.
A lack of finance and demand were blamed by the HIA for the low figures.
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