There are signs that the fiery PEI real estate market may start to cool down – but that doesn’t mean it will be any easier to break into the island’s competitive property market.
Nationwide, the market showed signs of calming in March as the number of homes sold and average sales price fell from the previous month. But this is not the case in Prince Edward Island
“Flatness hasn’t necessarily hit us here yet,” said James Margerison, the new president of the PEI Real Estate Association.
“But I wouldn’t be surprised, with interest rates going up and record highs, there’s going to be a period of sort of stabilization – I haven’t seen that yet.”
The latest statistics show that prices are continuing to rise at the moment. According to the PEI Real Estate Association, of the 194 homes or units sold in PEI in April, the median price was $414,742, up more than 20 percent from April 2021.
Despite these record prices, there were fewer homes sold in April on Prince Edward Island — nearly 23 percent less than the record sales last April. During the first four months of 2022, home sales were 9 percent lower compared to the same period last year.
That’s because, in part, there were fewer homes available for sale — what dealerships call low inventory. The number of new listings on the island in April, at 265, is down more than 17 percent from April 2021.
None of this is good news for buyers who are hoping the market will cool down so they can buy their first home or move into a larger one.
“If home prices go down a little bit or if there is a bit of a correction, you might think that could make it more affordable for people entering the market,” Margerison said.
“But if interest rates continue to rise, it could put more pressure on affordability in terms of monthly payment and stress testing, so that could stabilize it.”
He explained that buyers may need to make a larger down payment to keep monthly mortgage obligations more manageable given the higher interest rates.
“It’s a bit like a game when you mix interest rates and house prices.”
Prices are rising more slowly than they were a year ago, which is a “very slow rise,” said Sean Cathcart, the Canadian Real Estate Association’s chief economist who spoke to CBC PEI from his home in Ottawa.
“Our expectation is that things are going to flatten out somewhat and somewhat…it was kind of like that,” he said.
The sudden rise in mortgage rates in March saw a rapid slowdown in Canada’s more expensive markets in April.
“Not much in PEI,” Cathcart explained. “Affordable markets tend to be more immune to interest rate increases like this.”
He said the primary card for the maritime provinces of PEI, New Brunswick and Nova Scotia are out-of-area buyers who have just sold their homes in a hot market, and they have plenty of money to spend. He said they don’t care about mortgage rates, because homes are still relatively affordable.
“It’s a blessing and a curse that activity can continue at a higher level than you see elsewhere in Canada, where we’ve seen some significant slowdowns, but it’s also not great for locals vying for nearly record low stock of homes for sale.”
It’ll get worse
Margerison said he’s heard from potential buyers who have decided to keep renting until property prices drop.
If Cathcart’s predictions are correct, these buyers may wait a long time.
In fact, he said, the current market could make it more difficult for locals who have been priced out of the market in the past few years.
“I think it’s going to make it worse,” Cathcart said.
“Usually what happens when markets slow is you get a disconnect between buyers and sellers: sellers still want what the house across the street sold last year, buyers can’t offer, or don’t want to, so what happens is that the deal didn’t happen.”
He said lower stocks will rebuild as those homes stay on the market longer, and prices will eventually fall.
Affordability will come by reducing the scarcity of homes. – Shaun Cathcart– Shaun Cathcart
“You can go from everything that sells to multiple offerings, to nicer homes that still get their asking prices and some of the other homes around,” he said.
“This is what I expect: price stability and a natural increase in sales. And that’s what we expect in most places in Canada.”
Cathcart said mortgage rates will drive the change. Bank interest rates, which were 3.3 percent last month, rose almost a full percentage point in one month, to 4.1 percent.
“The market is coming out on top of what the Bank of Canada expects to do, which is to go from the overnight rate of one per cent now to nearly three per cent by the end of this year,” he said.
He said that fixed mortgage rates in banks had already been set in this forecast.
The good news is that if you’re looking for a mortgage now, interest rates aren’t likely to go up much more than that, he thinks.
“It’s only going to be the variable rates playing catch-up over the rest of the year,” he said.
It will increase inequality
The combination of all these factors will harm first-time buyers the most.
Cathcart said homeowners have spent several years building huge amounts of equity in their homes, which means those looking to relocate will continue to bid on newbies.
“If anything, it would increase inequality, which is really horrific,” he said. “Where the haves can go on and move, and the have-nots, that makes it hard for them to get their first home…it’s unfortunate.”
Cathcart said CREA is encouraging politicians to invest more in new housing. He said it’s the only way they see easing the housing crisis, but it’s easier said than done.
He believes the key is high-density multi-unit development such as townhouses with “less car space and more space for people”.
“Affordability will come by reducing the scarcity of homes, because the population will continue to increase” with international migration, he said.
The dearth of homes has put, and will continue to put, pressure on rental markets, Cathcart said, and caused prices for low-income Canadians to not rent.
“It might be a little frustrating…but these are things we have to think about,” he said.