Steeper falls in activity, new orders and employment saw the national construction industry suffer a bigger fall in March.

The latest Australian Industry Group Australian Performance of Construction Index in conjunction with the Housing Industry Association, dropped 5.2 points to 39.4 to remain below the 50 point level separating expansion from contraction for the tenth consecutive month. March's result is also the weakest reading on the overall state of the industry in two years.

Businesses in the sector cited subdued levels of incoming work, an associated shortage of new tender opportunities and low buyer confidence as factors behind the weak levels of activity.

Australian Industry Group Director Public Policy, Peter Burn, said: "The difficulties being experienced across the construction sector show no sign of abating. The four sub-sectors of apartment building, commercial construction engineering construction and house building were all in negative territory in March. The three sub-sectors other than engineering construction have been flat or falling since the middle of 2010 and the combined Australian PCI® has also been falling over this period.

"The slump across the sector reflects a variety of factors - the ongoing dampening impacts of last year’s interest rate rises, the caution on the part of house and apartment buyers and the failure of private sector commercial construction projects emerging to take up the slack as stimulus projects are completed. Nevertheless, an anticipated stronger inflow of infrastructure and resource based construction work is likely to provide critical support to overall levels of activity as we progress through the year," Dr Burn said.

Housing Industry Association Chief Economist, Harley Dale, said: "The continuing deterioration in the Australian PCI highlights a broad-based weakening in construction industry conditions in early 2011. The steeper decline in the activity and new orders components of construction serve as just two pointers to the pulse of the domestic economy beating slower this year.

"The damage from the rate hikes of last November has been substantial at a time when a credit squeeze remains stubbornly intact and the policy reform process has stalled. Steady interest rates are clearly an appropriate stance. As the new home building sector stares down the barrel of a sharp contraction in 2011, a reinvigorated policy reform process to reduce the excessive costs of new housing is paramount," Mr Dale said.

The latest sign of weakness in construction comes a day after official data showed home loans plunged in February as the share of first-home buyers continue to decrease. This is home loan’s second consecutive month drop with New South Wales posting its biggest monthly decline in fourteen years.

According to the Australian Bureau of Statistics, the number of home loans fell to 45,393 which is 5.6 per cent in February, following a revised 6.3 per cent drop in January. The sum was lowest number of home loans approved since February of 2001.