The Housing Industry Association (HIA) has claimed that a big drop in new home sales in May shows that a sustained recovery in home building cannot rely entirely on first home buyer activity.

New home sales in May decreased by 5.7 per cent, however it was still 15 per cent above the low point in December of 2008.

Low interest rates and the first home owners grant has boosted home building activity, however HIA believes that it is essential for the "much larger trade-up and investor segments to return to health".

"The on-going Henry Taxation review has seen some tax economists return to the tired argument that negative gearing be removed from housing investment. Speculation about the withdrawal of negative gearing risks a retreat of rental investors precisely at the time we need to be encouraging additional investment in rental housing," says HIA senior economist, Ben Phillips.

Sales of apartments and units grew on the back of a very weak early 2009 with 6.1 per cent growth during May. Detached New Home Sales decreased by 9.9 per cent in NSW, 8.7 per cent in Victoria and 13.5 per cent in Western Australia. Sales grew by 2 per cent in Queensland and by 3.6 per cent in South Australia.