Australia's construction industry remained damp in October largely due to persistent weakness in activity and new orders, although the rate of contraction was less than the previous month, a survey has found.

The latest Australian Industry Group Australian Performance of Construction Index (Australian PCI) in conjunction with the Housing Industry Association lifted 3.2 points to 44.0 in October (readings below 50 indicate a contraction in activity).

While the four major sectors again spent the month in negative territory, there was a distinct slowing in the pace of decline in the house building and commercial construction sectors. House building lifted 15.5 points to 47.9, the sector's highest reading in five months. Project delays and intense competition to secure existing contracts is continuing to have an adverse impact on activity, especially in the engineering construction and apartment building sectors.

Australian Industry Group Director Public Policy, Dr Peter Burn, said: "While the easing in the pace of decline of the construction sector during October is somewhat encouraging, the ongoing weakness in the sector makes it highly vulnerable to this week's increases in interest rates. The clear risk is that the trend back towards growth in the house building, commercial construction and apartment sub-sectors will be halted by higher borrowing costs and lower demand," Dr Burn said.

Housing Industry Association Chief Economist, Harley Dale, said: "While the slowing in the rate of contraction in the Australian PCI® in October provides better news in its own right it is, unfortunately, questionable as to whether this turnaround becomes a trend. The interest rate environment, in terms of both action and speculation, is proving highly damaging to home building confidence and activity at a time when there is already compelling evidence that 2011 will be a weaker year for residential construction.

"Furthermore, a clear and coordinated focus on housing policy reform to reduce the supply side impediments to new housing is sorely needed at this juncture - a loss of momentum in housing activity is hardly an excuse to put the foot on the policy brake," Mr Dale said.