Total dwelling unit commencements fell 6.5 per cent to 49,017 in the March quarter, the Australian Bureau of Statistics reported on Wednesday, with commencements on private sector houses down 11.6 per cent to 29,672.
"The slowing in commencements is not due to slowing demand," said Housing Industry Association economist Tom Devitt.
"Home building activity in the first quarter of 2022 was held back by staff shortages associated with the Omicron outbreak and the higher than usual uptake of holiday leave."
Overall there were a record high 240,065 dwellings under construction in March, up 2.9 per cent from the record high set in December.
Most of the increase comes from work on new detached houses, with 101,240 under construction in the first quarter.
The volume of detached work under construction is 80 per cent higher than its pre-pandemic levels, the HIA says.
"This was driven by the combination of the HomeBuilder grant and record low interest rates," Mr Devitt said.
The Morrison government's HomeBuilder program gave more than 137,000 Australians grants of up to $25,000 to substantially renovate or build a new home, in one of the biggest stimulus injections for the housing industry ever.
"Even after the end of the grant (in March 2021), all the extra time Australians were spending at home either working or locked down, resulted in a pandemic trend towards space and amenity," Mr Devitt said.
"This kept demand for new housing and renovations elevated"
Housing starts fell sharply in NSW (down eight per cent), Queensland (11.4 per cent), South Australia (down 20.4 per cent) and WA (down 32.2 per cent), but rose by 5.9 per cent in Victoria and 6.9 per cent in Tasmania.
Residential and commercial building work in the pipeline stood at a record $121.6 billion at the end of the first quarter, up by 27.7 per cent from a year ago.
Mr Devitt said the HIA believed that homebuilders would be busy through 2023 although costs and interest rate concerns would drive a shift towards more affordable higher-density units.
CommSec senior economist Ryan Felsman agreed there will be more demand for apartments, citing a "lift in overseas migration, deteriorating detached housing affordability and an acute rental shortage."
Elsewhere on the economic scene on Wednesday, a Business Risk Index survey by credit reporting bureau CreditorWatch indicated that business confidence is faltering, with trade receivables down by 18 per cent and trade payment defaults up 18 per cent year-on-year.
"We continue to see a disturbing rise in trade payment defaults, our leading indicator for future business insolvencies," CreditorWatch chief executive Patrick Coghlan said.
"Court actions are also back to pre-COVID level."
Also on Wednesday, Treasurer Jim Chalmers told reporters that the government is committed to ensuring pensioners don't fall further behind as inflation rises.
A half-yearly indexation rise for pensions is set to kick in from September 20, and Dr Chalmers said he would update the government's inflation expectations in late July when the new parliament session opened.
Looking ahead, jobs figures for June will be released on Thursday, with the unemployment rate widely tipped to fall from 3.9 per cent to 3.8 per cent - the lowest rate in 48 years.
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