Now is the easiest time in the last decade to buy a house, but it all depends on your definition of affordability, writes Una McCaffrey.

It might be hard to believe, but houses were more affordable in 2003 than in any year since the end of the last decade.

They were also more affordable than at the start at the 1990s and, perhaps even more surprisingly, more affordable than in the grim economic days of the late 1980s. The operative word here of course is "affordable", since, as countless house price surveys will confirm, anybody who thinks that houses have been getting cheaper over the past few years is mistaken on a very grand scale indeed.

Affordability, according to expert economists at Davy Stockbrokers, is "a function of the house price, the borrower's disposable income, the mortgage rate and housing taxation such as mortgage interest relief".

They say it takes in several factors, including a would-be buyer's ability to raise the initial deposit, their ability to qualify for a mortgage, their capacity to repay the loan and their ability to finance the additional details that any house purchase attracts, such as solicitors' fees, stamp duty and the cost of moving house.

Put all these delights in a mixing bowl and, hey presto, you have a measure of how well a given buyer can afford to pay for a given property. When you move a little further on and combine affordability with how confident a buyer feels about the market, you become closer than ever to the essence of the Irish property market.

The DKM Housing Affordability Index, compiled by a division of Davy, is more than helpful in this regard, since it judges how capable the average first-time buyer - the key dynamic in any housing market - might be of paying for their own home. This is done by measuring the proportion of after-tax income that would be needed to support the first year's mortgage repayments for a buyer on average income. In doing this, the index considers interest rates and the tax system, assessing how changes in both would bear down on affordability. It also looks at house prices, both nationally and in Dublin alone.

The results thrown up by the index are striking. They suggest that the proportion of a given buyer's net income needed to meet net mortgage repayments at the moment is about 30 per cent for first-time buyers in Dublin and about 24 per cent for the Republic as a whole. This is based on mortgage rates of about 3.5 per cent and an average national new house price of some €222,532, or €289,345 in Dublin.

This compares to 42 per cent for first-time buyer couples in Dublin at the start of 2001, and 33 per cent on a national basis.

The economists point out that at this time mortgage rates stood at about 6 per cent and the average new house in Dublin was changing hands for €248,000. They say that the improvement in affordability over the intervening period is a function of the downward movement in mortgage rates and growth in disposable incomes.

This has happened as average house prices in the Republic have climbed by some 22 per cent.

"Thus despite escalating house prices, housing affordability has actually improved over the last few years," Davy notes.

But what of the years to come; how "affordable" will houses be then? And, more crucially for the current batch of potential buyers, what of 2004? Helpfully, Davy tries out a few different scenarios for next year, just so that none of us can claim surprise when one or other of them comes to pass.

The first such picture sees house prices continuing to rise at the prevailing pace of 3 per cent for the final two quarters of 2003 (the official figures won't be available until the year ends) and then by a further 1.5 per cent per quarter in 2004. So far, so reasonable.

Even more rational is that, in the same scenario, mortgage rates would rise to 4 per cent (as most economists expect) in line with the economic recovery that now looks to be in place and that average incomes would grow by 5 per cent. In such circumstances, the affordability index that currently stands at 30 per cent in Dublin and 24 per cent nationally would rise to 31.6 per cent and 25.9 per cent respectively.

If house prices didn't budge but disposable incomes and mortgage rates rose as above, the affordability index would slip to 27.8 per cent in Dublin and 22.7 per cent nationally. And if (horrifyingly for existing homebuyers) house prices fell by 1.5 per cent over the next five quarters and incomes and mortgage rates again rose to 4 per cent, the Dublin index would drop to 25.2 per cent in Dublin and to 20.4 per cent on average.

The only case in which there was, as the Davy economists describe it, "a material worsening in affordability", was Case D. This scenario would involve a continuation in prevailing house price and income trends and, alongside this, a mortgage interest rate of 6 per cent, as in early 2001.

While such a rate might seem like a long way off at the moment, Davy acknowledges that it looks possible over the next few years, particularly since interest rates have already begun to rise in certain parts of the world.

For the purposes of illustration, the economists have calculated that (assuming no change in average earnings) average new house prices would need to fall by 22 per cent if affordability were to remain unchanged in a situation where mortgage rates rose to 7 per cent.

"But even a smaller increase, say to 5 per cent or so, would have a significant negative impact on the housing market," the research concludes.