RESIDENTIAL land sales have tumbled to the lowest level in 16 years as the malaise besetting Melbourne's housing sector infects the deepest layers of the property market.

Data released yesterday by the Housing Industry Association sheds new light on the severity of the downturn in house building activity as prices for established homes turn south.

The volume of land sales nationally collapsed in the final months of 2010, down more than 40 per cent in the three months to December compared with the same quarter a year earlier.

It was the fifth consecutive quarter that sales declined as supply constraints and risk aversion among lenders and borrowers weighed drastically on the property development market. In Melbourne, sales have plummeted about 65 per cent from almost 6500 lots at the peak of the market in the September quarter of 2009.

About 2100 lots sold in the three months to December - the least for any quarter since 1995.

The data provides the first indication that Melbourne's remarkable growth of the past decade - in which it dramatically closed the gap on Sydney as Australia's most populous city - is slowing.

It follows the revelation last week that the median house price in Melbourne dived 6 per cent in the three months to March, down $36,000 to $565,000.

In a report, the Housing Industry Association said Federal Government leadership to address the supply shortage "is now a not-negotiable".

"Given that residential land sales are the forward most leading indicator of future new home building activity, the profile (created by the sales data) is an alarming one," the report said.

Nationally, about 11,500 housing lots were sold in the December quarter, compared with almost 25,000 at the peak of the market.

As supply collapsed, land prices surged - up 8.2 per cent year-on-year in the December quarter across the capital cities and 25.7 per cent in Melbourne.

AMP Capital Investors economist Shane Oliver said that in the long run, tumbling land sales would choke house building activity, compounding the nation's housing affordability crisis.

Housing Industry Association economist Matthew King said rate rises last year had hurt demand for housing and land.

Originally published as Land sales collapse to 16-year low