Master Builders Australia has released forecasts for the building and construction industry showing a mixed recovery across the three major sectors based on a positive growth path over the three year forecast period to 2015-16.

The forecasts are derived from a model purposely built for the building and construction industry, developed by Master Builders in collaboration with Independent Economics.

While the forecasts predict a positive growth path for the industry, Master Builders believes the current economic climate presents many significant headwinds that may become impediments to the timing and strength of recovery in the forecast period.

According to the forecasts, the value of Residential Building work done is set to improve strongly, from a $46.2 billion base in 2012-13 to $60.9 billion in 2015-16.

Dwelling commencements are predicted to rise to 164,000 in 2013-14, 179,000 in 2014-15 and 183,000 in 2015-16 - more than a decade after dwelling starts peaked at around 175,000 in 2004.

Peter Jones, Chief Economist for Master Builders Australia said the underlying assumption is that low interest rates will work to release significant pent up demand after a long period of underbuilding that occurred at the same time as Australia experienced strong population growth.

"The improvement in the Residential Building outlook comes from a very low base and the challenge remains for policy makers to address supply side inefficiencies and impediments that have contributed to the nation's growing housing shortfall," said Mr Jones.

In the Non-Residential Building sector, work done is predicted to decline further in real terms in 2012-13 followed by modest growth to $33.9 billion in 2015-16.

Growth is expected to be driven by commercial and industrial building sectors, contrasting with weakness in social and institutional sectors and education related building.

"For Non-Residential Building, strongest performing states are forecast to be New South Wales, Queensland and Victoria, with industrial, retail and office building leading the way,” said Mr Jones.

"The key headwinds and risks are poor cash flows, low margins and tough lending criteria. Investor confidence also remains low reflecting current economic conditions," he added.

Despite signs the investment phase is beginning to peak, Engineering Construction activity is expected to remain strong - forecast to increase 5.4 per cent in real terms to $122.1 billion in 2012-13 before falling back 12 per cent to over the following three years to a level of $108.0 billion.

"After very strong growth, Engineering Construction activity in the Northern Territory, Western Australia and Queensland are forecast to fall back, albeit remaining at extremely high levels in an historical context. Victoria and Tasmania look set to benefit from stronger infrastructure spending," said Mr Jones.

Overall, Mr Jones believes the return to more positive conditions for the industry, implicit in the forecasts, is encouraging for the residential and commercial building sectors, but pointed out it does not herald a return to boom era levels.

"Master Builders, in forecasting improvement in building industry conditions, reinforces its call for ongoing microeconomic reforms at all levels of government in order to underpin the length and strength of the recovery. This will allow the industry to enter a sustained recovery and reclaim its role as one of the economy's key drivers," he concluded.