The outlook is promising for residential real estate in Sydney in 2012.

Business research and forecasting firm BIS Shrapnel says Sydney's housing market is set to regain momentum next year after a slump in 2010-11 following interest rate rises and slow economic growth.

BIS Shrapnel's senior project manager, Angie Zigomanis, said is a report that the decline in land activity in 2010-11 had created a rising undersupply in some markets.

The forecast from MIS reconciles with the projections of managing director of real estate group Mirvac, Nick Collishaw. He said the weak residential activity has peaked, in time for the reduction of interest rates by 25 basis points. Collishaw further cited the solid population growth and greater availability of mortgage finance as factors for a buoyant housing sales next year.

Both Collishaw and Zigomanis agree that the drop in interest rates provided a relief that would create positive results for new home development.

The Reserve Bank last week has cut interest rates for the first time in more than two and a half years, bringing relief to households and corporate borrowers. The cut had been widely tipped by economists before the announcement was made Tuesday last week.