Real estate market on P.E.I. shows only slight signs of cooling

There are signs P.E.I.'s red-hot real estate market could be starting to cool — but that doesn't mean it's going to 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 declined compared to the previous month. But that's not the case on P.E.I.

"The flattening hasn't necessarily hit us yet here," said James Marjerrison, the newly minted president of the P.E.I. Real Estate Association.

"But I would not be surprised, with rising interest rates and record highs, that there would be a bit of a flattening period — I just haven't seen that just yet."

The latest stats show prices continue to rise, for now. According to the P.E.I. Real Estate Association, of the 194 homes or units that sold on P.E.I. in April, the average price was a record $414,742, up more than 20 per cent from April 2021.

Low inventory

Despite those record prices, there were fewer homes sold in April on P.E.I. — almost 23 per cent fewer compared to last April's all-time record sales. During the first four months of 2022, there were nine per cent fewer home sales than the same period last year.

That's because, in part, there were fewer homes available to sell — what agents call low inventory. The number of new listings on the Island in April, at 265, was down more than 17 per cent from April 2021.

None of which is good news for buyers hoping the market cools so they can buy their first home or move up to a larger home.

"If housing prices were to fall a bit or if there was a bit of a correction, you might think that it could make it more affordable for people getting into the market," said Marjerrison.

"But if interest rates continue to rise, that could put more pressure on affordability in terms of the monthly payment and the stress test, so that could level it off."

Buyers might need to come up with a bigger down payment to keep their monthly mortgage commitments more manageable considering the higher interest rates, he explained.

"It's a bit of a shell game when you're juggling interest rates and house prices."

'Blessing and a curse'

Shaun Cathcart, a senior economist with the Canadian Real Estate Association who spoke to CBC P.E.I. from his home in Ottawa, said prices are rising more slowly than they were a year ago, which represents "a very slow topping out."

"Our forecast is for things to sort of flatten out and to some extent ... they kind of have been," he said.

The spike in mortgage rates in March saw more expensive markets in Canada cooling quickly in April.

"Not so much in P.E.I.," Cathcart explained. "More affordable markets tend to be more immune to interest rate increases like this."

The wild card for the Maritime provinces of P.E.I., New Brunswick and Nova Scotia is buyers coming 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 homes are still comparatively very affordable.

"It's a blessing and a curse that it can keep activity going at a higher level than you're seeing elsewhere in Canada, where we've seen some big slowdowns, but it's also not great for locals competing for an almost record-low inventory of homes for sale."

'Going to make it worse'

Marjerrison said he has heard from potential buyers who have decided to keep renting until real estate prices come 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 more difficult for locals who've been priced out of the market in the last few years.

"I think it's going to make it worse," Cathcart said.

"Typically what happens when markets slow down is you get a disconnect between buyers and sellers: sellers still want what the house across the street sold for last year, and buyers are not able to offer as much, or not willing to, and so what happens is the transaction doesn't happen."

Low inventories will rebuild as those homes sit on the market longer, he said, and prices will eventually flatten.

"You go from everything selling to multiple offers, to the nicest homes still getting their asking prices and some of the other ones sitting around," he said.

"That's what I would expect: a flattening out of prices and a more normal number of sales. And that's what our forecast is for most places in Canada."

Mortgage rates will drive the change, Cathcart said. Bank rates that were 3.3 per cent last month have risen almost a full percentage point in one month, to 4.1 per cent.

"The market's getting out in front of what the Bank of Canada is expected to do, which is to go from the overnight rate of one per cent right now to close to three per cent by the end of this year," he said.

Fixed mortgage rates at banks have already priced in that prediction, he said.

The good news is if you are looking for a mortgage now, interest rates are unlikely to rise much more, he believes.

"It's just going to be the variable rates playing catch-up with that over the rest of the year," he said.

'It's going to increase inequality'

The combination of all these factors will hit first-time buyers the hardest.

Homeowners have had several years of building huge amounts of equity in their homes, Cathcart said, which means those looking to move will continue to outbid first-timers.

"If anything, it's going to increase inequality, which is already terrible," he said. "Where the haves can continue to have and move around, and the have-nots, it just makes it harder for them to acquire their first home ... It's unfortunate."

Cathcart said CREA has been encouraging politicians to invest more in new housing. It's the only way they see the housing crunch being alleviated, he said, but it's easier said than done.

He believes the key is higher-density multi-unit development such as townhouses with "less space for cars and more space for people."

"Affordability is going to come by way of decreasing the scarcity of homes, because the population is just going to keep on increasing" with international immigration, he said.

The scarcity of homes in turn has put, and will continue to put, pressure on rental markets, Cathcart said, and price low-income Canadians out of even renting.

"Maybe it's a little bit depressing ... but these are things we have to think about," he said.