Construction has slipped to its worst level since the post Sydney Olympics slump, raising concerns that residential building could struggle to take over from mining to drive the economy.

The amount of construction work done in Australia fell 2.2 per cent in the September quarter, and was down 5.1 per cent for the year, official figures show.

It was the worst yearly fall since the 20 per cent slump after the Sydney Olympics building boom, UBS economists said.

Residential construction fell 1.6 per cent in the quarter, the Australian Bureau of Statistics said.

But the major drag came from engineering construction work, including mines, roads and bridges, which fell 3.2 per cent.

The downturn in engineering was expected, given the wind down in mining investment.

But the slide in housing construction was disappointing, TD Securities Asia-Pacific strategist Prashant Newnaha said.

He said the figures suggested dwindling confidence in the sector, although the value of private residential construction was near 25 year highs.

“This outcome is slightly disappointing in that the Reserve Bank has looked at this sector to pick up the slack and suggests a possible easing in ‘animal spirits’ that have characterised this sector,” he said.

“The slowdown in quarterly data suggest that the transition from mining to non-mining is proceeding at a slow pace.

“Today’s data point to a softer third-quarter gross domestic product outcome.”

JP Morgan economist Tom Kennedy said it appeared the peak in housing construction had passed.

“We still think you’re going to get that boost from residential construction to the economy, but it’s probably not going to be of the same sort of magnitude that you saw in the first and second quarters,” Mr Kennedy said.

But CommSec chief economist Craig James was more upbeat.

Despite the temporary glitch, house building would ramp up in the next year to take the baton as mining investment slowed, he said.

Government belt-tightening had also weighed on the figures, as governments scaled back on infrastructure spending to trim their budget bottom lines.

“The mining investment boom has ended, leading to weaker engineering work. But residential and commercial building work is filling the void, still rising in trend terms,” Mr James said.

“This is the baton pass that the Reserve Bank is focused on.”

He said while engineering construction was down 12.1 per cent for the year, residential construction was up by 8.6 per cent.

“Home building activity should remain healthy over the coming year and it is notable that work done is just a smidgen below record highs,” he said.

By Belinda Merhab