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Australia Banks on Housebuilding Boost

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Photo by Darren Booth for CNBC.com
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Sixty kilometers south-west of Sydney's central business district, one of the largest new housing developments in Australia is emerging on the site of an old racetrack.

Oran Park Town, a joint venture between the state government and Tony Perich, one of the country's richest farmers, will be home to 30,000 people once complete in 2025. And so far its mix of affordable three and four-bedroom homes and facilities close to industrial centers is proving popular with young families.

"Demand is very strong," says Andrew Guesdon, sales manager for Wisdom Homes, which has built 150 properties at Oran Park Town. "The developers are selling land which is not due for registration for six to nine months."

The fate of Oran Park is not just being watched closely by its developers. An increase in construction activity will be crucial to efforts of policymakers hoping to engineer a rebalancing of the Australian economy over the next year.

(Read More: Australia Central Bank Sees Scope to Ease, Watching Business Investment)

The Reserve Bank of Australia hopes the industry, which employs about 9 percent of the country's workforce of 11.5 million, can pick up the slack and maintain growth as Australia's unprecedented resource investment boom peaks at around 8 percent of GDP later this year.

After keeping its key interest rate unchanged at 3 percent last week, the RBA said there were early indications of a pick-up in housing activity as a result of "substantial easing" of monetary policy. The argument was given some support by the latest house price index from the Australian Bureau of Statistics, that showed a far stronger than expected 1.6 percent increase in house prices in the December quarter.

But in spite of record low interest rates and improved housing affordability many forecasters are worried construction will not be able to fill the gap and that Australia will struggle to meet the RBA's forecast for 2-3 percent GDP growth this year. They believe the central bank will be forced to cut rates again to stimulate demand.

"Residential construction has the potential to plug a considerable portion of the gap. But the question is, will that potential turn into reality?" says Harley Dale, chief economist at the Housing Industry Association, Australia's largest residential building organisation.

"Based on the current evidence, the rate of recovery [in the housing market] doesn't look like being of a significant magnitude."

Interest rates have fallen in the last few months to a post-financial crisis low of three percent, but even so construction has remained weak. Building approvals in December fell by a greater than expected 4.4 percent, while figures published on Monday showed mortgage approvals had fallen for a third consecutive month in December, with the proportion of loans going to first-time buyers falling to an eight-and-a-half year low.

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On Wednesday one of Australia's biggest housebuilders, Stockland Property Group, issued a profit warning and revealed a A$300 million impairment charge against a clutch of developments.

But anaemic demand is only part of the story. Land supply constraints are also a factor. In a recent paper the RBA highlighted the growing complexity of Australia's planning system. Part of that complexity is a move toward a "user pays" system which is hitting developers' profitability because they are forced to pay for roads, water and other community services.

Only a few out-of-town developments can boast the strong transport links and infrastructure of Oran Park Town, says Catherine Cashmore, senior consultant at National Property Buyers.

"Look at [the suburb of] Point Cook in Melbourne. That's an area people bought into and they bitterly regret it. They were told it was 25 minutes from the City . . . and now they spend three hours in morning peak traffic trying to get into Melbourne."

(Read More: Australia Leaves Interest Rates Unchanged at 3%)

Ms Cashmore says demand for new homes in the outer suburbs will not take off until state governments improve infrastructure links.

There are, however, reasons to think that a recovery will eventually take hold.

One is a shortage of housing and Australia's fast growing population. Although Australia has experienced a sharp rise in overseas migration since 2005 housebuilding has not kept pace, remaining close to its long-term average of 150,000 completions per year.

Another is affordability. The proportion of average income required to service a mortgage on an average priced dwelling is the lowest at any time in the past decade, apart from the first three quarters of 2009, according to Bank of America Merrill Lynch.

But to really breathe life back into the housing market, the RBA has to continue its easing cycle and cut rates again.

The approvals data serve to show the relatively fragile state of the recovery in key non-mining sectors, says BofA's Australia economist Saul Eslake. "To us this provides further evidence that suggests the RBA will need to cut rates further in the short term – we believe in March."

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.