Housing starts slumped to their lowest level in almost eight years in the December quarter as potential home owners were sidelined by worries about the economy, economists say.

The fall came despite aggressive interest rate cuts and government grants, which economists say may not be enough to hold off another fall in the present quarter.

The number of dwelling commencements fell by 9.9 per cent to 32,637 units, seasonally adjusted, in the December quarter, the Australian Bureau of Statistics (ABS) said on Thursday.

Quarterly housing starts had not been this low since June 2001.

In the year to December, total housing starts dropped by 19.5 per cent.

JP Morgan economist Helen Kevans said the quarterly fall in housing starts was the biggest in nearly eight years, with a 20.7 per cent fall in other residential buildings, which include flats, townhouses and villas.

The number of new private sector houses starting construction fell 4.9 per cent during the December quarter, the ABS said.

“The fall was the largest decline since the September quarter 2000, when starts plummeted 35 per cent quarter on quarter owing, in part, (then) to a change in the (GST) tax regime,” Ms Kevans said.

The fall in other residential building was driven by a 76.4 per cent slump in Western Australia and a 53.4 per cent decline in Queensland.

Ms Kevans said the increase in the first home owners grant, lower interest rates and cheaper housing did not give as much support to dwelling starts as would have been expected.

In mid-October, the federal government doubled the first home owners grant to $14,000 for established dwellings and was tripled to $21,000 for newly built properties.

From September to December, the Reserve Bank of Australia (RBA) lowered the cash rate from 7.25 per cent to 4.25 per cent, and cut the rate by a further percentage point in February to 3.25 per cent – a 45-year low.

“Housing starts remained under pressure from the lingering impact of the global credit crunch, the dampening impact of excessive red tape in the building sector, and the still sluggish rate of local council approvals,” Ms Kevans said

Westpac economists said a recovery in dwelling construction was unlikely in the short term despite a revival in approvals for home loans since August.

“Dwelling approvals have yet to pull out of their decline, pointing to another likely fall in starts in the first quarter of 2009,” Westpac Economics said in a research note.

“Starts may also decline in the second quarter depending on the timing and strength of any bounce in activity.”

Master Builders Australia chief economist Peter Jones said the federal government and RBA needed to do more to give a boost to the housing sector.

“It appears more stimulus is needed to kick-start the housing recovery and insulate the economy from the worst effects of the global financial crisis,” Mr Jones said.