Construction on new homes in New South Wales has hit its lowest recording in 56 years, suggesting property prices and demand will soon soar in the state.

The Australian Bureau of Statistics found dwelling commencements fell 25.7% in New South Wales in the year to June 2009, with working starting on only 23,257 new homes in the state, as the building industry continues to feel the pinch of high borrowing costs.

"Funding is a big issue," says Commsec economist Savanth Sebastian. "The New South Wales government needs to give further thought on how to entice investors in order to get the housing market moving again. With the population growing at its fastest rate in 40 years, incentives must be thought of to deal with the massive under supply."

Across Australia, dwelling commencements dropped 3.7% in the June quarter to 30,411, while in the year to June 2009, building starts fell by 24.1% to 1313,061 - a clear sign the country is yet to fully recover from the global financial crisis.