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 a statement.

“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 NSW, where the market is more subdued, and Western Australia, where activity has settled. More Reports