Should you buy now or wait for interest rates to drop?

With interest rates forecast to fall, one in three potential buyers are taking a wait-and-see approach, according to new Mozo research.

"In our recent consumer survey 39% told Mozo they are waiting for interest rates to drop before making a purchase, which shows there's a level of caution among buyers - perhaps from those who have seen friends with mortgages stung with 13 rate rises," says Mozo personal finance expert Rachel Wastell.

But will buying a home really be cheaper in the new year? For those in a position to buy now, but possibly looking to delay until 2025, here are a few things to factor into your decision-making.

Why interest rates are only part of the puzzle

There's a good reason why potential buyers are anxiously awaiting each RBA cash rate decision.

A lower cash rate could reduce borrowing costs and, consequently, monthly repayments.

The Mozo data showed that one in six are specifically holding out to secure a more affordable home loan.

With inflation falling to within the RBA target band for the September quarter, many economists expect the central bank to begin easing rates by February.

Less competition means more savings

But rates are only part of the equation, says Alex Veljancevski, a mortgage broker with Eventus Financial.

"While high rates may appear to justify the choice to hold off buying now, fewer interested buyers means less competition," he says.

Property prices expected to climb

While one in 20 buyers is hoping for a drop in property prices as interest rates decline, this seems unlikely.

According to ANZ, Australian capital city home prices are set to rise by 5.5% in 2025, with Perth (7.4%), Brisbane (6.4%), and Sydney (6%) leading the way.

This means that a $1 million property could cost an additional $55,000 or more next year.

Historically, buying before interest rates start to fall has been a strategic move, according to REA Group senior economist Eleanor Creagh.

"We typically see home prices lift with buyer confidence and borrowing capacities boosted as rates fall," she says.

"Though prices are likely to move higher as interest rates move lower next year, given the stretched starting point for affordability the price uplift could be more muted compared to prior easing cycles."

Still, by delaying a purchase, buyers risk not only higher prices but also increased competition as more people enter the market. This could outweigh any potential savings from lower interest rates.

Wastell supports this view: "You definitely don't want to look back and realise you missed out on making your move when the right opportunity was right in front of you."

Supply challenges creating rental pressure

Australia's housing market also faces a severe supply shortage, driven by slow construction rates, increased migration, and steady demand.

With fewer homes available, competition is still fierce among buyers, particularly in sought-after areas.

Home values rose 0.3% in October, according to CoreLogic's Home Value Index, marking 21 months of growth since the cycle commenced in February last year.

And while property growth is slowing, demand still outpaces supply, which continues to drive prices up.

This limited supply impacts not only the buying market but also exerts pressure on the rental market.

With housing options constrained, rental vacancy rates have hit record lows, leading to higher rental prices as more people compete for fewer available properties.

Oxford Economics Australia expects rent to grow by an average of 3.4% over the next three years - a rate marginally above projected core inflation.

So, while the rate of increase in rent is slowing down, your purchasing power will decrease, meaning you'll afford less with your income while your rent continues to rise.

In a market where both buying and renting are challenging, waiting to buy may mean dealing with financial strain from rising rents without building any long-term equity.

Conversely, buying sooner allows purchases to put money toward an appreciating asset, starting the journey towards homeownership and equity building rather than staying in the high-cost rental cycle.

Get stories like this in our newsletters.