Hopes for a recovery in the housing sector have been dashed by fresh data showing new home sales were flat in July.

The volume of new home sales increased 0.1 per cent in July, following a 0.5 per cent increase in June, the Housing Industry Association said today.

"Housing finance figures point to an emerging recovery in trade-up buyer and investor numbers, but looking beyond first time buyer related activity we're not as yet at a point where we can talk of a broad based recovery in private new home demand," HIA chief economist Harley Dale said in a statement.

States showed a wide variation in results with house sales dropping 4.4 per cent in Victoria, 11.6 per cent in South Australia and 3.1 per cent in Western Australia.

In NSW they increased 9.8 per cent and vaulted 10.2 per cent in Queensland.

"Throw into the mix approvals processes that are bogging down the recovery and a slow start to the Social Housing Initiative and we are looking at a moderate rather than strong lift in building starts through the second half of 2009," he said.

The Federal Government had hoped that the First Home Buyers grant, along with record low interest rates, would jumpstart the housing industry and provide a catalyst for the economy in coming months. The First Home Buyers grant boost is set to reduce to $14,000 from $21,000 by the end of September.

The Reserve Bank is widely expected to begin raising interest rates from its current level of 3 per cent, possibly as early as next month.

"In a change of forecast, we have dragged forward the expected timing of the RBA's first rate hike to October, from February," said JP Morgan economist Stephen Walters in a statement.

However, in the wake of more evidence that Australia's economy "apparently has skated through the financial crisis without sustaining much damage, the case for an earlier tightening has become irresistible," he said.