Activity in the construction sector expanded in January, with housing construction hitting a two year high on government stimulus, a survey shows.

The Australian Industry Group Performance of Construction Index rose 8.4 points to 57.7 in January, above the 50 level separating expansion from contraction.

In the industry’s strongest performance in two years, the house building sub-index grew 10.3 points to 63.7.

AI Group director public policy, Peter Burn, said the improved conditions coincided with the reporting of increased tendering opportunities, new contract wins and a further uptake of work stemming from the Federal Government’s infrastructure stimulus programs.

“In particular, house building activity has continued to expand with the flow through of first home buyer financed projects and the lagged impact of last year’s historically low mortgage rates,” Dr Burn said in a statement.

“There was also a positive tone in other areas of the industry with work on apartments, engineering and commercial building projects all moving back into growth territory.”

The federal government reduced the first home owners grant for new homes from $21,000 to $14,000 on October 1, 2009, and lowered it to $7,000 on January 1 this year.

The survey’s apartment building sub-index lifted by 16.4 points.

Commercial construction also rose following a sustained period of weakness.

Housing Industry Association Senior Economist, Ben Phillips, said that after a long phase of declining activity, the apartment activity index shows tentative signs of a much needed recovery.

“A housing recovery through 2010 and beyond will be vital to ensuring housing affordability does not deteriorate further in the face of very strong population growth,” Mr Phillips said.

“Higher interest rates and continued structural barriers to new housing will be the main threat to the housing recovery.”

In a series of moves between October and December last year, the Reserve Bank of Australia (RBA) lifted its official interest rate to 3.75 per cent from its 49-year-low of three per cent.

Commercial construction expanded for the first time since October, 2008, as indicated by an increase in the sub-index of 10.0 points to 59.9.

Firms attributed this rise mainly to work undertaken on Government supported social infrastructure projects.

Engineering construction activity increased strongly after contracting for seven consecutive months, the sub-index rising by 15.2 points to 57.0, with mining and oil & gas projects cited as driving growth.

AAP