There are signs that PEI’s red-hot real estate market may be starting to cool – but that doesn’t mean it will be any easier to break into the island’s competitive real estate market.
Nationally, the market showed signs of cooling in March as both the number of homes sold and the average selling price fell compared to the previous month. But that is not the case with PEI
“The flattening hasn’t really hit us here yet,” said James Marjerrison, the newly appointed president of the PEI Real Estate Association.
“But I wouldn’t be surprised that with interest rates rising and record highs, there would be some flattening out – I just haven’t seen it yet.”
The latest statistics show that prices will continue to rise for the time being. According to the PEI Real Estate Association, the average price of the 194 homes or units sold on PEI in April was a record $414,742, up more than 20 percent from April 2021.
Despite these record prices, fewer homes were sold on PEI in April — almost 23 percent down from record sales last April. In the first four months of 2022 there were nine percent fewer home sales than in the same period last year.
That’s partly because there were fewer homes for sale — what agents call low inventory. The number of new registrations on the island in April fell by more than 17 percent to 265 compared to April 2021.
Not good news for buyers hoping the market will cool off so they can buy their first home or move into a larger home.
“If house prices go down a little bit or there’s a slight correction, you might think this could become more affordable for people entering the market,” Marjerrison said.
“But if interest rates continue to rise, that could put further pressure on affordability around the monthly payment and the stress test, allowing it to level out.”
Buyers may need to put down a larger down payment to keep their monthly mortgage obligations more manageable given higher interest rates, he explained.
“It’s a bit of a shell game when you’re juggling interest rates and real estate prices.”
“Blessing and curse”
Shaun Cathcart, a senior economist at the Canadian Real Estate Association, speaking to CBC PEI from his home in Ottawa, said prices are rising at a slower pace than they were a year ago, which represents “very slow direction”.
“Our prediction is that things will kind of flatten out and to an extent … they kind of were,” he said.
The rise in mortgage rates in March led to a rapid cooldown in higher priced markets in Canada in April.
“Not so much in PEI,” Cathcart explained. “More affordable markets tend to be immune to such rate hikes.”
The joker card for the maritime provinces of PEI, New Brunswick and Nova Scotia are buyers from outside the region who have just sold their homes in a hot market and have plenty of money to spend, he said. They don’t care about mortgage rates, he said, because houses are still very affordable by comparison.
“It’s a blessing and a curse that it can keep activity at higher levels than you’re seeing elsewhere in Canada, where we’ve seen some big slowdowns, but it’s also not great for locals struggling around a near-record low.” Inventory competes with homes for sale.”
“Will Make It Worse”
Marjerrison said he’s heard from potential buyers who have decided to keep renting until house prices go down.
If Cathcart’s predictions hold true, those buyers could be waiting a very long time.
In fact, he said the current market could make it even harder for locals, who have been squeezed out of the market in recent years.
“I think it’s going to make it worse,” Cathcart said.
“When markets slow down, there’s usually a disconnect between buyers and sellers: sellers still want what the house across the street was sold for last year and buyers can’t offer or aren’t ready to offer as much and stuff like that what happens if the transaction doesn’t happen.”
Low inventories will build up again as those homes stay on the market longer, he said, and prices will eventually flatten out.
Affordability is achieved by reducing the scarcity of homes. – Shaun Cathcart—Shaun Cathcart
“They go from everything that’s selling to multiple offers, the nicest homes that are still getting their asking prices and some of the others that are sitting around,” he said.
“That’s what I would expect: a leveling off in prices and a more normal number of sales. And that’s our forecast for most places in Canada.”
Mortgage rates will drive the change, Cathcart said. Bank rates, which were 3.3 percent last month, are up almost a full percentage point in a month to 4.1 percent.
“The market is going beyond what is expected for the Bank of Canada to rise from an overnight lending rate of currently 1% to almost 3% by the end of this year,” he said.
Fixed-rate mortgage rates at banks have already discounted that forecast, he said.
The good news is, if you’re looking to get a mortgage now, he thinks rates probably won’t go up much more.
“It’s just going to be floating rates that will catch up with that for the rest of the year,” he said.
“It will increase inequality”
The combination of all these factors will hit first-time buyers the hardest.
Homeowners have accumulated tremendous amounts of equity in their homes for several years, Cathcart said, meaning those looking to move will continue to outbid first-time buyers.
“If anything, it will increase inequality, which is already terrible,” he said. “Where the haves can continue to have and move, and the have-nots, only makes it harder for them to acquire their first home… It’s unfortunate.”
Cathcart said CREA encouraged politicians to invest more in new housing. It’s the only way they’ll see the housing crisis eased, he said, but it’s easier said than done.
He believes the key is to build higher-density, multi-unit housing such as townhouses with “less space for cars and more space for people.”
“Affordability will be achieved by reducing the housing shortage because the population will continue to increase through international immigration,” he said.
The housing shortage, in turn, has and will continue to pressure rental markets, Cathcart said, discouraging low-income Canadians from renting in the first place.
“Maybe it’s a little bit depressing … but those are things we need to think about,” he said.