New home building has recorded its second highest rate of expansion since 2005, as low interest rates work to stimulate the housing market.

Strong growth in house building last month has helped drive the broader construction sector to its third consecutive month of expansion, after several years of decline.

The Australian Industry Group/Housing Industry Association’s Performance of Construction Index fell 4.4 points to 50.8 in December, but remained above the 50-point level that separates expansion from contraction.

The house building sub-sector rose 1.5 points to 63.5.

“This is more evidence that low interest rates are doing their thing,” JP Morgan economist Ben Jarman said.

“The housing market is doing quite well. It’s one part of the economy playing the script on what is supposed to happen when rates are this low.”

Mr Jarman said rising house prices were acting as a catalyst to drive people to think about building their own home and also helped property developers to get projects off the ground.

Ai Group public policy director Peter Burn said the figures indicated 2014 would be a better year for the construction industry.

“The continued growth of new orders means that builders – and the manufacturing and service industries that are linked to the commercial and residential construction sectors – can look forward to 2014 with a greater degree of confidence than prevailed only a few months ago,” he said.

By Belinda Merhab and Evan Schwarten