A recovery in demand for new housing starts is now taking place, thanks to low interest rates and government incentives, according to a report.

BIS Shrapnel said the solid increase of 7% in national dwelling approvals seen over the three months to March 2009 is an indication that things are looking up for home building. The latest demand is coming increasingly from "upgraders" - those who have sold their properties to first homebuyers recently and are now looking for a new home, it says.

One of the largest recipients of this demand has been Victoria, which saw dwelling approvals jump 22% in the first quarter of 2009. South Australia wasn't far behind, with an 18% increase.

"The evidence from Victoria is that upgrader demand is already recovering in that state," said Jason Anderson, a BIS Shrapnel senior economist. "And this source of sales should recover in other states due to attractive interest rates."

Melbourne and Adelaide have especially benefited from lower land prices, as land affordability is much cheaper than in some other capital cities. That contrasts sharply with Sydney, where high land prices have pushed a greater dependence on medium to high density dwellings. And those types of projects just aren't being built fast enough to keep up with the demand in Sydney.

"The global financial crisis has made it much more difficult for developers to access credit, and the plunge in apartment projects has reduced this opportunity for all households, including first homebuyers," said Anderson.

This slow building in New South Wales has kept supply well below demand, a benefit to investors. But BIS Shrapnel said the state would lag behind a national economic rebound forecast in 2010 if more wasn't done to encourage more building.

"Residential building is the traditional driver of recovery from recession, so it is vital that policy efforts are focused on this sector," said Anderson.

BIS Shrapnel is now predicting dwelling approvals throughout Australia will increase 10% during the June quarter.