"To house" means to enclose. So in this case you could also say, "The rotation of the shaft carries the film of oil round the inside of the bearing and keeps the shaft from contact with the bush which encloses it." It means that the shaft is inside of the bush.

"It" here is the shaft. The "bush" is a sort of sleeve which houses (or contains) the shaft. The bush does not come into direct contact with the shaft, because the shaft has a film of oil on it.