Wellington is falling behind while the housing market is looking good again after its biggest lift in monthly sales for five years after a bout with the recent global financial crisis.

Prices in Wellington have fallen by over $40,000 in the past year, while the city is continuing public service cuts and job losses.

The Real Estate Institute says the national housing market was very strong in March, with the median house price hitting a new record of $370,000. In contrast, the median price in Wellington's eastern suburbs dropped $48,000 to $505,000, western suburbs' prices fell $29,000 to $491,000 and the Lower Hutt median price plummeted $43,000 to $339,000.

In further contrast, the median price increased $45,000 to $345,000 in Upper Hutt, Central Wellington prices rose $44,000 to $494,000, and Wairarapa numbers went up $9,000 to $229,000.

The median price for Wellington homes in March was $393,750, an amount that is lower by $21,250 compared to March 2011 median price. However, the institute noted there was a big jump in the number of houses sold and the length of time it took to sell a house was shorter, taking an average of 34 days.

"Agent reports suggest that there is increasing activity from first-home buyers, with KiwiSaver accounts increasingly being used to fund deposits on houses, although other buyers in the market are still cautious," the institute's report said.