The pressures impacting on housing affordability, especially for first home buyers, are likely to worsen in 2008, the Real Estate Institute of Australia (REIA) has warned. Rising interest rates, population growth and price increases caused by a shortfall in the supply of new homes are contributing to a 22-year low in affordability. As a result many home buyers are considering medium and higher density housing as more affordable options, institute president Noel Dyett said.

“In 2008, the main challenges facing the real estate market will be low home loan affordability, the possibility of more interest rate rises, the ongoing fallout from the US sub-prime problems, and an extremely tight rental market driving rents up,” he said.

During 2007 the real estate market was split between established home owners, who enjoyed a “vintage” year, and new entrants who experienced a “less fortunate” time.

The institute’s outlook for 2008 suggests house prices will continue to rise in all states except New South Wales, where the market is more subdued, and Western Australia, where activity has settled.

The Australian average median house price was $442,758 in the September quarter 2007, the REIA said.

Sydney had the highest median price at $538,400 followed by Perth ($455,000), Melbourne ($431,000), Canberra ($425,000), Darwin ($400,000), Brisbane ($383,500), Adelaide ($320,00) and Hobart ($317,00).

“Well-located property, close to employment opportunities and infrastructure will continue to perform well,” the outlook says.

“The upward movement in prices for other dwellings suggests that many home buyers are considering medium and higher density housing as more affordable options in a market where affordability is very low. It is likely that this sector will experience ongoing price growth during 2008.”

The institute says price rises are being driven by population growth, demand for newer and more environmentally-sustainable housing in areas close to employment and essential services, and a shortfall in the supply of new dwellings.

The transfer of infrastructure costs into the pricing of new homes was also pushing up prices of established homes and dwelling approvals were not keeping pace with the demand for additional housing stock.

“The prospect of higher interest rates will potentially see this continue into 2008 with an accompanying tightening of sales volume, as people become more resistant to selling,” the REIA said.

First home buyer numbers have fallen below the long-term average and the institute says the outlook does not look positive.