The wording probably was just intended so that the balefire couldn't be breathed upward into another height band...
And if you're playing elves, why don't you have Militia, Spearmen, or Archers? Or a Lotus Eater? If your Devout player is a fan of the Soul Flayer, introduce him to the Flying Dragonbane.
I have all of those, the problem comes in with the massive amount of wounds that the sf has (5 wounds). The flying dragonbane may do a maximum of 4 wounds and then be eaten. Milita, spearmen have to make a dread test before attacking the sf, both having about average leadership and neither have i been able to fully take down a sf (partly bad dice rolling, partly the strength of the weapons). I have used archers effectively against the sf, but that is only when the player makes the mistake of putting the sf closer than any of his other units.
Good point!
But in my example models would be in HB 0 and 1 and could attack the Soulflayer while she is in HB 1...
Troops with spears may even attack flyers in HB 2, depending how tall they are...
so are all troops effectively in HB 1?

that would make a little more sense... although you would constantly have to state exactly how far in HB1 you are flying since not all troops are the same 'height'. Dogs, for instance, are shorter than elves and so they would have a hard time attacking something at 3 in.