William's family "seemed in good health and everyone was happy" when they arrived at the then 81-year-old's home at Kendall on September 11 in 2014, the grandmother told police at the time.

The next morning the family awoke and William's foster father left to visit a nearby town while the three-year-old, his sister and foster mother stayed at home with the grandmother.

"William was dressed in a 'Spiderman' costume and he was full of beans," the grandmother told police a few days later according to a statement released by the NSW Coroners Court on Tuesday.

"He was jumping out of his skin with energy."

After playing on the rear verandah William ran around the right side of the house toward the front of the property.

"That's the last time I saw William," she said.

The woman describes the harrowing first moments of the search in which her daughter, William's foster mother, was calling out for the young boy.

Police arrived to search the house and surrounding area and the scene descended into "pandemonium", the foster grandmother stated at the time.

"I can't think of anyone who would want to harm William," she said, noting local police officer Wendy Hudson first asked the question.

"I suggested (a neighbour) across the road (as he keeps odd hours and lives alone).

"Wendy assures me that she has checked him out thoroughly."

The neighbour was investigated and ruled out as a suspect, according to police sources.

The foster grandmother, in the same police statement, said she was also concerned William might have made his way to nearby Batar Creek Road which had "lots of traffic moving back and forth".

Deputy State Coroner Harriet Grahame is conducting an inquest into William's disappearance.

The first hearing in March hinted evidence will likely show William did not wander into the rugged bushland around the Benaroon Drive home and was possibly abducted.

The inquest is scheduled to resume on August 5.

Australian Associated Press