Look at the worst-case scenario. Observers are predicting price falls of 15, 25 or even 30 per cent over the next few years, with some saying it will be 2012 before the market recovers. Does it make sense to buy a home? A new analysis from the agent Savills should help potential homeowners to decide whether the sums add up - even if it takes years for house price rises to resume.

Take Savills' warning that the credit crunch may cause house prices to fall 10 per cent this year and another 15 per cent in 2009. Should these total price declines of 25 per cent become a reality - the latest Nationwide figures suggest prices have dropped 8.1 per cent in 12 months - Savills predicts that the cost of buying will be brought in line with that of renting by the end of next year, helping to restore demand.

Lucian Cook, a director of research at Savills, said that should rents rise 10 per cent over this year and next, and prices drop the estimated 25 per cent, the cost of buying with an interest-only mortgage will be just 4 per cent more than renting. At that point, Mr Cook says, “we expect people to buy back into the market”.

The analysis, based on average UK property prices and rental yields, takes into account potential income lost by choosing not to invest equity elsewhere, as well as typical buying costs such as stamp duty, and running costs such as repairs and insurance. But it ignores capital appreciation - the factor that encouraged many buyers to wade in during the recent boom years but which cannot be relied on in the current, more subdued market.

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The Savills research shows that the actual cost of buying (for a homeowner in her first year of paying off an interest-only mortgage) has been greater than renting since 2004. But for those borrowers - the majority - who choose to pay off the capital, not just the interest, buying has been more expensive than renting since 1999, just a few years into the boom.

In 1996 a homebuyer could pay off capital and interest and still be quids in: she was paying on average 10 per cent less than rental costs. But by the peak of the market last year she was paying a massive 76 per cent more to buy. Even a buyer on a less onerous interest-only mortgage was paying 44 per cent more than a renter.

Savills says that renting has remained affordable relative to buying in recent years because rental growth has been subdued. But now the tide has turned, with rents rising consistently despite the flood of unsold homes reportedly coming into the rental pool.

Katherine Loynes, a property search agent who runs Bespoke Property Finder, sold a two-bed apartment on Richmond Hill for £596,000 at the height of the market last April in favour of renting. She says: “I just had an inkling that the market had got overheated. I expected to rent for 18 months, but now I think it will be another 12 to 24 months before it recovers.” Ms Loynes, who made almost £150,000 on her flat, which she spent £100,000 renovating, will be willing to reinvest the proceeds in property when the market starts moving again, which she thinks will start with sellers being willing to accept realistic prices. Many sellers have been reluctant to cut asking prices: in the boom they tolerated the extra costs of ownership because they were banking on capital appreciation.

Buyers have also been all too aware that, over the course of a 25-year loan, inflation and wage growth will erode the value of expected mortgage repayments, while rents can be expected to carry on increasing. This should make paying more to buy in the short-term a financially sound decision. But the recent boom unbalanced these sums: the cost of a repayment mortgage over 25 years is currently 40 per cent more than renting.

Savills' research suggests that by the end of next year buying will, over a 25-year mortgage, again be cheaper than renting, prompting potential buyers to re-enter the market.

bespokepropertyfinder.com

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