Private sector home building is set to slump following a large reduction in new home sales over recent months, a survey of Australia's major residential builders, shows.

The latest HIA - Jeld-Wen New Home Sales Report has found that the number of new homes sold increased by only 0.6 per cent in September 2010.

However, sales were down by 14 per cent for the September 2010 quarter and were 15 per cent below the level of new home sales for the September quarter of the previous year.

HIA Chief Economist Harley Dale said that leading indicators signal a contraction in new home building in the post stimulus environment of 2011.

"The appropriate decision for the Reserve Bank next Tuesday is to keep the cash rate on hold," Dr Dale said.

"Heightened speculation about increased interest rates has been damaging to housing sentiment and activity. Warnings from the banks of pending increases in mortgage rates outside of changes in monetary policy have been unhelpful to buyer confidence and are causing potential buyers to stay on the side-lines.

"HIA does not buy the argument that Australian banks have any justification to independently raise interest rates," Dr Dale said.

"As it stands the lack of available credit from Australian banks to small and medium sized residential developers is contributing to the renewed weakness in new home building conditions that has become evident over the course of 2010," Harley Dale added.

Detached house sales increased by 1 per cent in the month of September 2010 but were down by 15 per cent over the quarter. Sales in the multi-unit sector fell by 2.4 per cent in the month and were down by 1.5 per cent over the quarter.

In the month of September 2010 detached new house sales increased by 5.9 per cent in New South Wales and by 3.6 per cent in Queensland, although both these markets suffered double digit declines in sales volumes in the September quarter. Sales fell by 3.1 per cent in Victoria in the month of September and were down by 4.6 per cent in South Australia and 1.8 per cent in Western Australia.