The slump across the construction industry has become more deeply entrenched, with activity in the key residential sector experiencing its sharpest decline in more than six years.

Key points: Activity fell across all key construction sectors in January, but house and apartment construction were the hardest hit

Activity fell across all key construction sectors in January, but house and apartment construction were the hardest hit The rate of decline of jobs in construction has accelerated

The rate of decline of jobs in construction has accelerated Economists tip residential construction has shifted from being a positive for GDP growth to a drag

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (PCI) found that, while there was broad-based weakness across all construction sectors, the contraction in residential activity continued to accelerate last month as demand dried up and prices fell.

The weakness is flowing into jobs, with the employment sub-index contracting for the sixth successive month, but at a faster pace.

This backs up recent Australian Bureau of Statistics data that construction jobs were drying up, falling by 1.6 per cent in the three months to November last year.

Not surprisingly, apartment construction was the weakest performing sector, declining for a tenth consecutive month and at the sharpest rate since July 2012.

House building also remained deeply in negative territory, with its rate of contraction the most rapid in six-and-a-half years.

New orders for houses were also noticeably softer, pointing to further weakness down the track.

There was little cheer in either engineering or commercial construction, with both starting the year on a weak note, failing to break out of their more recent downturns.

Engineering construction — which includes big infrastructure projects — recorded its lowest activity reading in three years, according to PCI data.

The survey also found builders were increasingly being squeezed by higher costs and falling sales prices, with weak buyer demand leaving them unable to pass on the costs.

"While the decline in activity is now well-established, levels of activity remain respectable by historical standards reflecting the dimensions of the preceding boom," Ai Group's head of policy Peter Burn said.

GDP hit by housing sector

JP Morgan economist Ben Jarman said the residential slowdown was becoming a drag on the broader economy, forecasting it would lop 0.3 percentage points off GDP growth over the next couple of quarters.

"During the upswing, residential investment added 0.3 percentage points to growth per year," Mr Jarman said.

"A similar unwind is now due," he noted.

That drag fits in with the Reserve Bank's more downbeat assessment on the economy, with governor Philip Lowe now admitting a stimulatory cut in interest rates, was as likely as hike.

Mr Jarman said house prices are likely to fall further, but the rate of decline should not accelerate as "transaction volumes are weak" and there is not much evidence of new sellers entering the market.

Tighter lending, flowing from APRA's crackdown on banks' credit quality as well as the banking royal commission's scrutiny of the banks' mortgage businesses, are also having an effect.

"Tighter lending criteria have the strongest implications for consumption, in that weaker credit growth and falling asset prices will prevent the saving rate from declining any further. In other words, consumption will decelerate toward income growth," Mr Jarman said.

"This pushes GDP growth back below potential, and keeps the RBA cash rate steady, if not biased lower."

Despite the slowdown, big residential property developer Mirvac beat expectations with a strong six months to the end of December.

Mirvac's first-half operating profit was up 26 per cent to $290 million, thanks to a solid investment portfolio and a high occupancy rate in its commercial properties.

"Although residential markets continue to deteriorate, we are still seeing consistent demand for our high-quality, well located product from our predominantly owner-occupier target market," Mirvac chief executive Susan Lloyd-Hurwitz said.