Just when the market had anticipated Australian construction had hit "peak weakness", activity has posted its biggest fall in 16 years.

Key points: Construction work tumbles 4.9pc, biggest fall in 16 years

Construction work tumbles 4.9pc, biggest fall in 16 years Weakness in residential construction likely to drag GDP growth down

Weakness in residential construction likely to drag GDP growth down Construction activity in WA down 43 per cent over the year

On seasonally adjusted figures from the Australian Bureau of Statistics, construction work fell sharply by 4.9 per cent in the September quarter, far worse than consensus expectations of a 1.6 per cent slide.

It represents the third consecutive quarter in decline.

On an annualised basis, construction work is down 11 per cent, a further slowing from the 9 per cent slump for the June quarter.

The weakness was broadly based, including disappointing activity in residential building and non-residential construction as well as the ongoing contraction in large scale engineering work in the resources sector.

ANZ head of Australian economics Felicity Emmett said the fall in housing construction is surprising, given ongoing strength in building approvals and a record backlog of work in the pipeline.

"Adjusting for the underreporting of renovations to existing homes, we estimate private residential construction fell 2.5 per cent in Q3 after a 3.7 per cent gain in Q2," Ms Emmett said.

Ms Emmett said the result is likely to slice a "massive" 0.7 percentage points off third quarter GDP.

"This would be the largest subtraction since the GST-related collapse in housing construction in 2000," she noted.

Western Australia biggest drag

Western Australia remained the biggest drag with construction activity now down 43 per cent on a year ago.

Construction activity fell in Victoria for the first time in more than a year, down 7 per cent on the June quarter, while New South Wales was down 2 per cent and there were smaller declines in South Australia and Queensland, down 1 per cent and 0.2 per cent respectively.

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The figures indicate that, while the unwinding of the resources boom has been largely completed in Queensland, it still has a fair way to run in WA and the Northern Territory.

Private engineering work was down 6.6 per cent for the quarter, which was better than a more than 16 per cent fall in the June quarter but still 36 per cent lower than a year ago.

Public engineering - largely government funded infrastructure work - declined marginally due to poor weather but is picking up, averaging increases of around 4.5 per cent for the past three quarters.

UBS economist Scott Haslem noted private non-residential building - down almost 13 per cent for the quarter - had taken over the mantle from engineering as suffering the biggest drop across the all sectors.

"While we viewed last quarter as the peak of weakness - which it clearly wasn't - the cycle turn in engineering that call was based on is occurring," Mr Haslem said.

"However, an unexpected slump in non-residential building, also its worst in 16 years, and a soft quarter for residential both conspired to render the overall construction story still weaker."

Mr Haslem said the data puts soon to be released third quarter GDP on track for a "flat" result, well below the current estimates of 0.5 per cent growth.