"It is clear that housing activity is consolidating with potential home buyers being more circumspect on purchases – a result which is encouraging, as it should ensure a much more sustainable housing market."

Mr Sebastian said the figures, collected from a sample of Australia's 100 largest home builders and covering about 14 per cent of the home building industry, would not have fully factored in May's surprise rate cut, which was likely to boost demand for property.

The lobby group for volume home builders stressed that the fall, driven by an 11.5 per cent decline in NSW sales, was part of a cyclical downturn.

"There is nothing alarming to a reversal in the trend for new home sales," HIA chief economist Harley Dale said. "There is a cyclical downturn ahead for new residential construction activity, as new home sales signal, but the early pullback will be mild by historical standards."

New home sales for May. HIA

New home sales have fallen for two months now in NSW and Queensland. They also declined in Victoria, the largest market, after a strong rise in April.

They rose in both South Australia and Western Australia, which the HIA said showed those two markets had troughed.

The industry organisation said the report said the fall in NSW – which has seen strong activity as a result of pent-up demand caused by a decade of underinvestment in housing – to the lowest level in at least three years was no reason to panic.


"We want to see a decent recovery in June before becoming overly concerned," the report said.

There was a risk, however, that detached house approvals could suffer a "relatively sharp decline," the HIA said.

New dwelling approvals for May will be published on Monday. Figures for April published last month showed approvals of new detached houses fell 1.9 per cent from the previous month.

Concern is growing about a rising oversupply of apartments – seen in the fact that some developers are boosting commissions to clear stock – and the HIA warned that the high numbers of new apartments approved may not be built.

"A key factor to watch is the medium-high density market where the large pipeline of work to be completed and the record pipeline of work approved but not yet commenced sets up a period of unprecedented uncertainty," it said in the report.

"Regardless of the relative strength to any trend recovery [in apartment approvals] over the last six months, these lead indicators provide less forward guidance than usual because of the uncertainty surrounding the record pipeline of work approved but yet to commence construction."