Westpac economist Andrew Hanlon said the drop in new dwelling construction came as a surprise after the property market surged late last year.
“We expected a solid rise,” he said.
Mr Hanlon blamed time lags for the result and said that recent success in real estate markets had not yet flowed through to dwelling construction.
“Dwelling approvals were up 24 per cent in 2013, so the sector is set for a strong upswing,” he said.
“With the concentration of approvals in high-rise dwelling developments, which have longer lead times, the upturn appears to be taking longer to come through than anticipated,” said Mr Hanlon.
Housing Industry Association economist Geordan Murray also attributed the 2.5 per cent drop to a time delay, but warned that the residential building recovery should not be over hyped.
“We are seeing good things across a number of leading indicators, but today’s data reaffirms our view that the speed and strength of the recovery in residential building has been overstated in some forums,” he said.
Residential renovations, which do not suffer the same lags as new construction, strengthened by three per cent in the quarter, largely reversing a 4.1 per cent fall in the third quarter.
“Activity in this part of the market had dropped to a decade low in the middle of 2012. It appears that low interest rates and rising home prices are providing a much needed boost to demand in this segment,” Mr Murray said.
Overall, total construction fell by one per cent, driven by a drop of 1.8 per cent in total private construction.
Public construction fared better, with an increase of 2.5 per cent for the fourth quarter of 2013.