Construction sector activity has expanded at its fastest pace in more than two-and-half years on the back of a pickup in apartment building and sharp increase in engineering work.

The Ai Group and Housing Industry Association Performance of Construction Index (PCI) rose 4.8 points to 56.7 points in May, its fourth consecutive increase. A reading above the 50-point level indicates expansion.

Apartment building drove May’s lift, with the sector’s activity sub-index expanding 13.2 points – the steepest pace since November 2015.

However, house building activity weakened, returning to negative territory for the first time in five months, in a further sign that the housing sector is cooling.

Engineering construction was the second strongest performing area, with its rate of growth at a nine-and-a half-year high, on the back of increased levels of non-mining infrastructure work.

“Much of the construction industry was seeing stronger activity in May, reflecting the very high building approvals numbers we have seen of late,” Ai Group Chief Economist Julie Toth said.

“Building approvals trends plus the forward orders series suggest this boom in apartment construction activity still has some way to run.”

A stronger flow of work from big transport infrastructure projects and from commercial projects relating to tourism, healthcare and manufacturing seems to be countering the down-swing in mining-related engineering projects, she added.

The activity and new orders sub-indexes also showed stronger growth in May, leading to an upturn in employment.

HIA Senior Economist Shane Garrett said the data provides further evidence that the strength of apartment building is holding up for considerably longer than expected.

He said work on apartment projects started in 2016 would support on-the-ground activity in residential building for much of this year, and take the edge of home price pressures.

“There are already signs that the large volume of newly-built apartments becoming available for occupation in Sydney and Melbourne is taking some of the edge out of dwelling price inflation in Australia’s two largest cities – good news from an affordability perspective,” Mr Garrett said.

By Prashant Mehra