Spurred on by falling interest rates, cheaper house prices and government handouts of up to $21,000, first home buyers are back.

But with some experts predicting house prices could fall further, is it the right time to buy?

Initial indicators show first home buyers are upbeat. In December, lenders provided finance to 14,154 first home buyers, according to the Australian Bureau of Statistics. Those loans made up 25 per cent of home loans that month - the highest rate of participation by first home buyers in more than a year. In March last year, first home buyers accounted for 16 per cent of lending. The long-term average is 20 per cent.

Fifty per cent of potential first home buyers believe it is a good time to buy, according to the latest Mortgage and Finance Association of Australia/Bankwest Home Finance Index. Almost one-third of respondents give falling house prices as their reason, 16 per cent cite lower interest rates and 8 per cent highlight the first home buyer grant. Significantly, the 43 per cent of potential first-time buyers who say it is not a good time to buy expect to see further declines in house prices.

A fall of 10 per cent on a $400,000 property means a $40,000 saving, almost double the $21,000 grant.

And while waiting may be a gamble, you also have to do the sums on renting versus making mortgage repayments to see which is a better proposition.

Property prices

Credit ratings agency Fitch Ratings is working on the assumption banks will have to deal with an increase in defaults as a result of rising unemployment and house prices will fall as a consequence.

Property information service RP Data assumes unemployment will rise to 7 per cent by the end of this year, which it considers a negative indicator for property prices.

However, offsetting this is the big fall in rates since September and an undersupply of homes in capital cities.

"Low interest rates and the continued serious undersupply of housing in Australia will continue to hold a floor under capital city residential values in the lower and middle segments of the market," says RP Data.

The interest rate strategist at Macquarie Bank, Rory Robertson, says Australian house prices are not cheap by world standards. He cites the 2008 Demographia survey of home prices compared with incomes in Australia, the US, Britain, New Zealand and Ireland. Residential property in the Sunshine Coast, Gold Coast, Sydney, Melbourne, Adelaide, Perth, Wollongong, Darwin, Townsville, Mackay, Cairns and Rockhampton were all classified as expensive, with the Sunshine Coast, Gold Coast and Sydney in the top 10.

The comparison of home prices and incomes in 265 city markets around the world shows the median house price is three times annual household income, a ratio that has stayed constant for five years.

But Sunshine Coast homes have a median price that is 9.6 times median household income, Gold Coast homes have a price to income ratio of 8.7 times, Sydney 8.3 times, Melbourne 7.1 times and Adelaide 7.1 times. All are classified as severely unaffordable.

The handouts

The first home buyer grant has been increased for contracts made between October 2008 and June 30, 2009; there's an extra $7000, or $14,000 for buyers of established homes, and an extra $14,000 for people building new homes, or $21,000. State governments provide additional concessions and benefits.

The NSW Government offers a $3000 supplement for people eligible for the first home buyer grant who are buying a new home between November 2008 and November 2009, and also provides a concession on duty on the purchase. First home buyers pay no duty on a home worth up to $500,000 (the duty on a home of that value is $17,990) and a concessional rate on a home valued between $500,000 and $600,000.

There is no duty for first home buyers buying vacant land worth up to $300,000 and a concessional rate on vacant land worth between $300,000 and $450,000. A calculator for working out the concessions is at osr.nsw.gov.au.

First home owner grants and tax concessions are administered at state level and there are variations from state to state. In Victoria, for example, first home buyers can get an additional grant if they are buying a new home outside Melbourne. For more information, see firsthome.gov.au.

Do you qualify?

The traditional method lenders use for assessing a borrower's debt-servicing capacity is to impose a limit of gross income that can be allocated to debt payments. The standard limit is 30 per cent but the Australian Prudential Regulation Authority has reported that some lenders have gone as high as 50 per cent. Today most lenders have tightened their criteria and 30 per cent is what you would expect.

Lenders may use an alternative debt-servicing calculation called the net income surplus model, which requires the borrower to have a minimum surplus of after-tax income after taking debt servicing into account. In a recent study APRA found the median after-tax income coverage was 1.9 times debt repayments, with a range between 1.5 and 2.5 times.

You should also check your credit rating. Defaults on credit card accounts, telephone bills and other utilities may end up on a credit file. Lenders refer to these files when they are assessing loan applicants and a poor credit history could put the lender off. Sometimes errors appear on credit files and if there has been a fraud an entry might end up on the file. These can be corrected.

Anyone can check their credit file. The biggest consumer credit reference service is run by Veda Advantage. The company's website has instructions on how to request a copy of a credit file.

Family guarantee

An innovation in the home loan market is the family guarantee mortgage. According to the 2008 Genworth Mortgage Trends Report, these loans take several forms. Parents or other family members can act as guarantor, using the equity in their home as security for a portion of the loan.

In other cases family members can pay the deposit or agree to share the repayment costs.

Genworth found such products are not popular, with only 34 per cent of people saying they would consider using one.

The added complexity of the product puts people off, as does the risk of a dispute arising over repayments. Independent legal advice is recommended before entering into a family guarantee arrangement.

Open a first home saver account

Launched by the Government last year, the accounts offer a combination of concessional tax on the interest earned and a Government contribution.

This will not help people who want to buy a property before the end of June but it is useful for people with a long-range plan.

Interest earned on account balances will be taxed at 15 per cent (interest earnings are usually taxed at marginal rates). The Government will contribute 17 per cent on the first $5000 deposited each year over four years, meaning account holders can qualify for up to a total of $3400 of government contributions. Withdrawals are tax-free and can be made for one of two purposes: to purchase or build a first home in which to live, or to transfer into a superannuation fund if, due to a change in circumstances, a home is not going to be purchased.

To qualify you must make personal after-tax contributions (deposits cannot be made by way of salary sacrifice) of at least $1000 a year over four financial years (they do not need to be consecutive years).

Account balances are capped at $75,000 although that amount will be indexed. A customer can only operate one account at a time.

Where to for housing prices?

RP Data says Perth had the biggest fall in residential property values in 2008, with the median dwelling (houses and units) price falling 8.8 per cent to $460,000.

Sydney prices were down 2.9 per cent over the same period, with the median price for a house $557,000 and $418,000 for a unit in December.

The Melbourne market was down 1.2 per cent, with median prices of $448,000 for a house and $353,000 for a unit. In Brisbane, prices fell 2.8 per cent, with median prices of $445,000 for a house and $326,000 for a unit. The Canberra market was down 1.3 per cent, with median prices of $484,000 for a house and $363,000 for a unit. The markets that rose were Adelaide and Darwin but the gains were tiny.

RP Data forecasts that Sydney has the best opportunity for capital growth in residential property values this year because the market has stood still for such a long time. "Sydney house prices are about $40,000 lower than their peak reached back in 2004," it says.

The group warns that the riskiest property will be in coastal and holiday regions: "Tourism numbers are projected to fall considerably during 2009, which will be detrimental to the coastal markets.

"At the same time many holiday-home owners have been forced to place their weekenders on the market . . . when there is already a great deal of stock available in these locations."

Macquarie Bank's interest rate strategist, Rory Robertson, agrees that beach houses are of great risk.He expects the value of coastal property to fall between 25 to 50 per cent.

Robertson says the other market likely to fall was premium housing. "The Australian sharemarket slump means many $1 million to $10 million homes will fall by 25 to 50 per cent."

Referring to a prediction by University of Western Sydney economics professor Steve Keen that house prices would fall 40 per cent, Robertson says: "Rate cuts, full-recourse loans and the absence of overbuilding offer protection from Keen's forecast . . . 80 per cent of houses are worth less than $600,000."

Time is right for getting into the market

Matthew Fernandez thinks it is time he bought some real estate. The 26-year-old IT professional has been living with friends in a shared house in Newtown for the past two years and feels this particular lifestyle may have reached its use-by date.

Fernandez finished his university degree at the end of 2007 and works as a database administrator for a legal services company.

He feels ready for a change in his living arrangements.

He would probably be house-hunting anyway, whatever the market conditions and level of Government handouts, but says those factors have also influenced his thinking.

"From what I read and hear homes are a lot cheaper than they have been for a long time," he says.

"On top of that the first home owners' grant has been increased.

"Our lease runs out in June.

"I could live in another shared house but I am more inclined to get into the property market."

Fernandez says he would like to stay in Sydney's inner west, close to work and his social network.

He recognises that with a recession looming, rising unemployment could push house prices down further. But this does not deter him.

"This is a good stage in my life to be doing this," he says.

"Anyway, property is a solid investment. It is not a bad move to buy a house."