A rise in the number loans to first home buyers to the highest levels in 18 years, driven by low interest rates and generous government grants, supports an ongoing recovery in the housing sector, economists say.

First home buyers represented 26.5 per cent of all loans written for owner-occupied housing in January, an improvement from 25.7 per cent in December.

It was the largest proportion recorded since the start of the data series in 1991 and the third consecutive monthly rise, figures from the Australian Bureau of Statistics (ABS) on Wednesday show.

Overall, the number of new loans for owner-occupied housing increased by 3.5 per cent in January, ABS figures showed.

It was the fourth straight monthly rise, albeit slightly below market expectations of a four per cent improvement.

Westpac Banking Corporation senior economist Andrew Hanlan said households had clearly responded to lower interest rates and the boost to the first home owners grant.

“Moreover, the housing finance recovery has gathered pace and broadened in its scope,” Mr Hanlan said.

“Upgraders, initially slow out of the blocks, are now responding.”

Mr Hanlan said demand for housing finance was expected to rise further in coming months, given the stimulus already in the system.

“However, rising unemployment and tighter lending standards will be a constraining factor,” Mr Hanlan said.

The federal government doubled the first home owners grant to $14,000 for established dwellings and tripled it to $21,000 for newly constructed homes.

The boost, announced in October, is due to expire on June 30 this year.

Meanwhile, the Reserve Bank of Australia (RBA) has cut official interest rates by 300 basis points, or three percentage points, between September and December last year.

The big commercial banks have passed on most of that large decrease to their home loan customers.

The central bank did not meet in January but cut the cash rate again in February to a 45 year low of 3.25 per cent. A further cut is expected in April.

St George Bank treasury economist Amanda Tan said the lift in demand among first home buyers in January as housing affordability improved “may filter through to non-first home buyers later this year”.

The overall January result was underpinned by an increase in loans to buy existing homes, which was up 3.9 per cent, and to finance the construction of new properties, up 2.5 per cent.

ICAP senior economist Adam Carr said the construction figure bode well for a recovery in the building sector, with the prospects for the second half of 2009 looking much better.

“This suggests those building approvals should rise, the demand is there and certainly at an accelerating pace,” Mr Carr said.

“I think the construction cycle is looking like it will pick-up, although whether its going to occur quick enough to avoid another quarter of negative growth is doubtful.”

Loans to buy a new home fell 1.4 per cent.

Housing Industry Association senior economist Ben Phillips said the data should be regarded as positive, but said there was a way to go before the market returned to healthy levels.

“Amidst so many negative updates on the Australian economy of late it is encouraging to see owner occupier home lending trending higher,” Mr Phillips said in a statement.

The ABS data showed continued weak demand for investment properties, with the value of all loans made in this category falling 3.8 per cent in January.

“With other asset markets still in decline, the increase in residential property yields and falling borrowing rates have clearly not been enough to entice investors into property,” ANZ Banking Group economist Alex Joiner said.