Australia's construction sector dived in July, with firms in the commercial and engineering sectors citing particularly difficult conditions, according to data released today.

Australia Industry Group and the Housing Industry Association's survey of more than 150 companies found numerous reports of tough market conditions, weak demand and intense competition in obtaining new projects.

Home builders also mentioned the negative impact on activity from recent interest rate hikes, tight finance restrictions and low demand from first home buyers.

The overall construction index slumped 3.1 points in July to a 12-month low of 43.3, pulling it further below the 50 threshold between expansion and contraction.

HIA chief economist Harley Dale said, "A universally negative result for the index across all construction sectors represents a disappointing and weak update on the Australian domestic economy early in the third quarter."

The measures of commercial building fell 16.5 points to 35.3, while engineering slumped 16.7 points to 36.2. The latter came shocking as the mining sector has a huge pipeline of engineering work to do and the states are all investing heavily on infrastructure.

The index for house construction edged down 4.9 points to 38.9, in line with previous weakness in home building loans. Climbing 1.1 points to 45.1, the apartment sector was the only one to show gains.

The survey's measure of new orders declined 2.7 points to 43. Employment also weakened, shedding 0.8 points at 43.3.

Inflationary pressures decreased, with the measure of input costs 5.1 points lower at 67.7. Selling prices also backpedalled, down 2.2 points to 53.2.

According to Australian Industry Group director of public policy Dr Peter Burn, consumer and business caution was detracting from demand across the industry after slumps in activity and new orders.

"This, together with the dampening impacts on the construction industry of the continued unwinding of public sector spending and higher interest rates, is slowing the momentum of recovery in the broader economy."

"Businesses in the construction industry are competing vigorously for new work with a nervous eye both on their order books and emerging wage pressures," Mr Burn said.