Weak new home sales signal a need for steady interest rates, according to Australia's largest residential building organisation.

The number of new homes sold fell by 2.6 per cent to 6887 in August, the Housing Industry Association said in a statement today. Sales declined by 13 per cent over the three months to August to be 11 per cent lower when compared with the same period in 2009. Building approvals dipped by more than 6 per cent for the three month period to July 2010, and are expected to weaken further.

HIA Chief Economist Harley Dale said previous interest rate hikes and the withdrawal of fiscal stimulus have quelled new housing demand, while there has not been enough progress made in reducing the supply side barriers that lifts the cost of new housing.

"An array of leading housing indicators, including new home sales, is signalling a fall in housing starts in 2011, even if interest rates remain steady. That outcome will mean there has only been two years in the last 10, 2002 and 2010, when new home starts have grown," Dr Dale said.

"A premature hiking of interest rates would exacerbate the impending decline in new home building," Harley Dale said.

"At the same time, renewed weakness in new housing highlights the opportunity to act, rather than an excuse to sit back, when it comes to creating a more flexible and less costly regulatory environment than the one which is currently pushing people away from new housing towards existing property," Dr Dale added.

Detached house sales dipped by 3.4 per cent in August 2010, while sales in the multi-unit sector rose by 4.3 per cent.

In the month of August 2010 detached new house sales were down by 20.3 per cent in New South Wales. Figures also backpedalled in Queensland, falling by 2.8 per cent, and in South Australia, lower by 5.6 per cent. Sales improved by 2.6 per cent in Victoria and by 2.7 per cent in Western Australia.

Financial markets are already pricing in about a 60 per cent chance of a 25-basis-points hike in the official cash when the Reserve Bank of Australia board meets on October 5. With economists forecasting about 1.25 percentage points in interest rate increases by the end of 2011, the most highly geared households could be vulnerable to a sharp increase in their repayments.