The report by economic and industry sector forecaster and analyst BIS Shrapnel found that the progress of the medium and high density dwelling markets will be determined suburb-by-suburb by the availability of suitable land for development and land prices.
"We are forecasting that an expected mild oversupply will be absorbed towards the tail-end of this decade, buoying rental growth," the report said.
Entitled Medium and High Density Dwellings in Sydney Suburbs, 2004 to 2009 the report said this recovery would, however, be stifled by rising interest rates, which would once again deter investors.
It concluded that - barring the release of any new major sites in middle ring suburbs - which include Sydney's inner west, lower north, Canterbury-Bankstown, and central west - housing developments will be forced into outer suburbs like Fairfield-Liverpool, the outer west, outer southwest, Blacktown, and the Gosford-Wyong region.
"Broken down by geographical region, inner and middle ring Sydney have attracted a diminishing level of medium density dwelling development," the report said.
"(This is because) the large rise in site values of recent years have made lower density dwelling development increasingly unviable, and necessitated higher density construction, such as apartments."
Subsequently outer Sydney would attract a greater proportion of medium density development, the report said.
Higher land values on the suburban fringes, and their impact on housing affordability, will result in less detached house development and increasing medium density activity."Medium and high density approvals peaked in 2002 and 2003 and have now started to trend down," the report said.
"This reflects a declining investor presence in the market."
Senior project manager and study leader Angie Zigomanis said that in the past two years detaiched house approvals contracted by 30 per cent.
"This is largely a result of a lack of sufficient broad-hectare land for development, deteriorating affordability and the expiry of the additional first home owners grant," he said.
"Over the same period, medium and high density dwelling approvals have remained relatively steady, buoyed by strong investor demand."
Zigomanis said that BIS Shrapnel anticipates over the next five years a higher proportion of medium density approval activity will take place, particularly in middle and outer Sydney.
"This will be driven by the 50 plus age group, who are experiencing the fastest rate of growth in the number of households," he said.