Housing construction will stay strong over the next 18 months even though approval numbers have peaked, the Housing Industry Association says.

Un-met demand in NSW, sustained market strength in Victoria and a recovering Queensland market will ensure 200,000 new dwelling commencements – the second-highest level on record – this financial year.

Housing starts in NSW are likely to increase 7.1% this year before falling over the next two years. Victoria is likely to see a fall of 34% from 65,235 this year to 42,910 in 2017-18, but may perform better.

“You could get a stronger short-term new home building environment in Victoria than is our forecast,” HIA chief economist Harley Dale said.

Growth in housing renovations is likely to be contained to Sydney and Melbourne.