Building costs in the $12 billion construction sector are falling and the industry could be in for a recovery by 2011, says the Institute of Economic Research (NZIER).

In its property and construction forecast for consultants Rider Levett Bucknall, NZIER predicted house-building would continue to suffer low levels of activity, but falling costs would spark the broader building sector into a recovery in the next two years.

"Building cost escalation is forecast to continue easing until early 2010 with falling investment in non-residential buildings," the report said.

"It is forecast to rise gradually over 2010 and 2011 as economic growth accelerates, inflation rises and building investment resumes growing."

Statistics NZ this week released building consent figures showing commercial building reaching new highs.

Consents for work worth $530 million were approved by councils in April and $479 million in May.

These are the two highest figures since numbers were first compiled 44 years ago.

NZIER said evidence was emerging that economic activity internationally was stabilising, financial conditions were improving and the New Zealand economy would begin growing again towards the end of this year.

But it noted low levels of confidence in the building sector at present because 64 per cent of firms expected general business conditions to deteriorate in the next six months.

"Although the total value of non-residential building activity and consents continued to break new highs, firms across the building industry remained pessimistic about their prospects," NZIER said.

"Over coming months, more consented projects than usual may be delayed, altered or cancelled before building work commences depending on economic conditions."

The country's largest building site is the $1 billion hotel project at Queenstown's Kawarau Falls, where work is continuing while receiver KordaMentha assesses the situation.

Hugh Mackenzie, Rider's Wellington manager responsible for the quarterly forecasts, endorsed the study's findings, predicting a recovery in two years' time.

But he said it was unrealistic to believe the building sector would not remain slow until then.

"For commercial building, there will be a fall-off on the back of completed work and nothing to take its place through this year and next, but then a recovery after that," Mackenzie said.

The Government's need to spend money on infrastructure would result in it building prisons and health and education facilities, but plans for these large buildings took time to complete, he said.