Any future recovery in the building industry will be gradual and uneven, with NSW and Western Australia forging ahead while Victoria languishes, an economic forecaster says.
BIS Shrapnel's Building Industry Prospects report for March says confidence - until now the missing ingredient in the industry's recovery - was "at last showing signs of improvement".
"For more than a year, the fundamentals such as pent-up demand and lower interest rates have been in place, yet prospective players remained on the sidelines," the report said.
"In 2013, sentiment is turning," it said, but any upside would be hit by "a major correction downwards" in Victoria, South Australia and Tasmania, states that had over-built in the past few years.
The increase in confidence is being seen in loans to NSW investors, which accounted for three-quarters of January's national increase in the total value of lending finance.
NSW rose sharply in January, up by 32 per cent to $2.15 billion, according to Australian Bureau of Statistics lending finance figures. Similar loans in Victoria rose 16per cent, to $1.56billion.
Nine-tenths of demand for finance was from investors. Investor loans - including for refinancing - were up 19 per cent while owner-occupier loans rose by only 1 per cent.
Total building activity will record modest starts growth of about 1 per cent this financial year, while total building activity will gain about 3 per cent the following financial year (2013-14), BIS suggested.
The pace of growth in Australia's population was picking up after sharp falls following the global financial crisis. Net overseas migration reached 208,000 people last financial year and annual national growth was expected to rise to 1.76 per cent in two years.
"As net overseas migration and population growth have strengthened, underlying demand has already begun to recover from its 2010/11 low," the report says.
Residential building was expected to surge in under-supplied markets such as NSW, but would shrink in Victoria, BIS expects.
The forecast growth follows ambitious targets set by NSW Premier Barry O'Farrell's government for population growth in the state.
The NSW government recently unveiled a revised housing target for an extra 545,000 homes by 2031, an average of 27,250 a year.
NSW's draft Metropolitan Strategy is expected to explore ways to increase the supply of new homes by rezoning larger projects that have the support of both local government and the private sector.
Victoria's manufacturing sector was the hardest hit of all states.
The state's housing market has moved from under to over-supply and "significant volumes of dwelling completions are still set to enter the market", BIS said.
The state's total dwelling commencements are forecast to fall 5 per cent this financial year and drop sharply the following year.