Is this the right time to buy?

If you are a renter looking to climb on the housing ladder for the first time, now may be the time to make your move, according to Abbey.

The bank has compared typical rents and mortgage payments for first-time buyer (FTB) type properties across the country and reckons that outside London, a typical buyer would save £624 by buying instead of renting.

Within London, rents are still lower than mortgage payments.

Of course, because of the fairly strict lending rules, there is the small matter of scraping together a 25% deposit, which on a terraced house or flat worth an average £92,861 is going to be a hefty £23,215.

Then there's the up-front costs, mortgage fee and other overheads of buying.

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Whoa! Hold your horses
These hurdles are of course going to stop many of the 1.6 million people that Abbey reckons are aching to get on the housing ladder outside London.

And, without impugning Abbey's calculations (or its motives as a purveyor of mortgage products) the advice might still be premature.

Even those lucky enough to have the cash for the deposit might want to hold their horses because they may get better deals by waiting.

After all, you've probably already suffered years of agony, having watched house prices move inexorably out of reach.

Okay, since October 2007 things are finally going your way. But wouldn't it would be daft to leap immediately, if prices are set to continue falling for some time?

But will prices fall?
Ratings agency Fitch earlier this month forecast a further 17% fall in British house prices, making a total fall of 30% from the peak set in October 2007.

That would be fairly typical for a housing correction. In the last housing downturn, which started in summer 1989, prices continued to drop for six years.

It would be peculiar, this time round and with a far heftier economic downturn, for it to be over in two years.

"The UK's average house price to income ratio remains significantly above the long-term average," said Brian Coulton, head of global economics at Fitch Ratings.

Indeed, it would be even more peculiar if the market started to recover without even having fallen enough to touch the long-term average ratio of house prices to incomes of 3.6, yet alone to overshoot down to two times, as it did in 1995.

The current ratio of 4.5 times average income in September is still significantly unaffordable, despite being lower than the peak 5.5 times.

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Buy now or miss out?
Not everyone sees it that way, of course. Some estate agencies see the current bullishness continuing after several months of house price rises.

That's the kind of talk to stampede those who are perhaps too young to remember the 1990s into a "buy-now-or-miss-out-for-ever" attitude.

There are also a few other factors which may be boosting affordability, and hence demand. The main one is the low interest rate outlook.

Existing homeowners who acted quickly managed to lock in mortgage rate trackers just above zero.

Even the best deals now for FTBs, including lifetime discount mortgage at 4.24% from the Loughborough Building Society, or a two year discount from HSBC at 3.89% are still relatively low historically.

There are also population pressures, and deposit money borrowed from parents which are also fuelling demand.

Still, it doesn't look enough to swipe away a proper housing correction - especially when you look at the dire state of the wider economy.

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Don't expect this rise to continue
The Halifax's house price index rose 2.8% in the third quarter, with three straight months of price rises, but the bank is wisely cautioning buyers against extrapolating this into the future.

"Continuing increases in unemployment and low earnings growth are likely to constrain the rise in demand, said Halifax's chief economist Martin Ellis.

The buyers' mood is in doubt
That's the crucial point. Even if house prices do nothing, the average buyer is going to struggle to feel confident to afford them, so long as unemployment continues to rise.

That isn't just the effect of actually losing your job, but the foreboding felt by millions whose jobs may be in danger, and the associated clampdown on wage rises.

This effect isn't by any means finished in the private sector, but after the next election, due by June 2010, it is likely to press particularly hard in the public sector.

This has so far escaped relatively lightly, but is bound to be hit by promised public spending cuts from whoever is voted in.

Deep down, most of us would rather own our own homes than rent them, but taking on the commitment of a mortgage and all its ancillary up-front costs requires some confidence in our job and income prospects.

That just doesn't seem to be there now.

Will house prices fall again? Share your views.

Inflation and its insidious effects
There is something else worth considering too: the lack of inflation.

Inflation is generally considered a bad thing, but for those who take out a mortgage it is ultimately good, because the debt is set in nominal terms (pure pounds and pence) but incomes from which they are funded tend to rise.

So in early 1981, when I was killing myself trying to afford my first mortgage whose rate had risen to 13%, the pain was relatively short-lived.

Retail prices the previous year had risen 18%, and so did incomes, including mine.

Interest rates, wage inflation and prices were stubbornly above 10% for much of that decade, but in real terms my mortgage payment burden halved in about five years, and so did those of millions of others.

Where the burden falls
Then, high rates of inflation front-loaded the burden of a mortgage on to the early years.

Now, low interest rates make the initial payments affordable, perhaps more so than rents, but they will stay a hefty slice of disposable income for many years longer.

The other effect of low inflation is on rents. They may not rise as much as forecast if the economy remains weak.

The decision...
None of this makes the decision any easier. There are dozens of non-money factors involved in the decision to buy, and ultimately those who fall in love with a particular home and can afford it would be daft to wait and risk losing it for a thousand or two off the price.

But overall, Abbey's advice looks premature. On balance, history tells us that prices have to fall further.

Once the job market stabilises, and the economy has begun to grow, then buyers (first time and others) will be able to return with a bit more confidence.

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