Housing affordability is down, but interest rate stability may pave the way for new home building activity, according to the HIA.The HIA-Commonwealth Bank Housing Affordability Index fell by 1.8 per cent in the December 2010 quarter to be down by 10 per cent on the same period December 2009 quarter.

The HIA says the news is evidence that the interest rate hikes of November last year put a dent in housing affordability. "Housing affordability suffered a big hit over the course of 2010, with a clear driver being the interest rate increases in March, April, May and November, said HIA's chief economist, Dr Harley Dale.

"It is a positive sign for the housing industry that in 2011 the Reserve Bank has clearly signalled a period of interest rate stability. This situation could add to confidence and, in time, new home building activity, said Dale."Federal and state governments could enhance the prospects of a renewed confidence towards new housing. Governments need to up the ante on delivering policy reform on a range of supplyside constraints, including the lack of affordable land and the dire shortage of available credit forcommercially viable residential projects."

A downward trend in residential construction over nearly a decade now is obviously tied to a downward trajectory in housing affordability, which is in no small part attributable to supply sideobstacles to new housing."

Regardless of the particular juncture we are at with the interest rate cycle, lack of government action to reduce artificial constraints to new housing supply reduces Australians access toaffordable housing,” added Dale.

Across Australia's capital cities housing affordability in the December 2010 quarter deteriorated in Sydney (-5.5 per cent), Melbourne (-2.6 per cent), Adelaide (-3.4 per cent), Hobart (-1.4 per cent), and Canberra (-3.5 per cent). Affordability improved modestly in Brisbane (+0.5 per cent) and Perth (+0.1 per cent).

Outside of the capital cities, affordability improved in the non-metropolitan regions of New SouthWales (+2.8 per cent), Victoria (+1.3 per cent), Queensland (+1 per cent), and South Australia (+1 per cent), but deteriorated in Western Australia (-2 per cent) and Tasmania (-3.8 per cent).