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Several housing reports have been released over the last couple of weeks, and they all tell the same story: house prices are soaring.  And if you have been paying attention to the market here on PEI you have seen the increase here especially. 

Records are being broken on a monthly basis, seemingly with no end in sight. Below we explore where prices may be headed and how it may impact home buying decisions. 

Annual House Price Gains Rivalling Incomes

To illustrate the scale of these annual gains, BMO Economics economist Sal Guatieri released a note entitled: “Your House Makes More Than You Do.” 

He pointed out that in some communities, house price gains are outpacing household incomes. Benchmark house prices in a number of communities are up over $100,000. In Hamilton-Burlington, the benchmark house price is up $154,000 over the past year. Even on PEI we were used to seeing higher housing prices in bigger cities like Charlottetown but now are starting to see in smaller communities homes selling for almost as much. 

In comparison, the median household income as of 2018 was $86,970. This also doesn't help considering a lot of people were financially impacted during covid but homes are still selling at higher prices regardless of those factors. 

What’s driving the surge in prices?

There are several factors behind the run-up in prices. 

  1. Low interest rates: Despite rising fixed mortgage rates, interest rates are still at historically low levels, which has helped affordability, even at today’s higher price levels.
  2. Low supply: CREA reported a record-low 1.8-month inventory of housing supply. That’s how long it would take to liquidate the current housing supply at current sales levels. In 40 markets across Ontario, there is now less than one month of inventory. High demand and low supply equals upward pressure on prices. I have clients that have been waiting for months to find a home but homes are selling in less than 24 hours from being on the market and above asking price.
  3. FOMO: The “fear of missing out” is driving countless buyers to bid on properties for fear of missing out on the sale and being forced to search for another property at an even higher price. This is a self-perpetuating phenomenon, as aggressive bids continue to drive up prices more quickly. 

Here’s how CREA’s chief economist Shaun Cathcart described it: “Part of it is demand that is being pulled forward from the future, either in search of a home base to ride out the pandemic or to lock down a purchase amid rapidly rising prices while securing a record-low mortgage rate.” 

Where do prices go from here?

While prices are expected to keep marching forward this year, 2022 should finally see a return to more moderate appreciation.

In CREA’s updated forecast released this week, the association said it expects prices to post a 16.5% gain over the course of 2021 to $665,000. In 2022, it sees price gains falling to a more moderate pace of just 2%, to $679,341. 

Other market-watchers, like Ksenia Bushmeneva of TD Economics, agree. 

“Historically tight supply of houses on the market will continue to push prices higher in the near-term,” Bushmeneva wrote. “However, home price growth is expected to moderate in the second half of this year, as prospective sellers become more comfortable listing amid accelerating vaccination pace and buyers shift their attention to more affordable options.”

What should potential homebuyers do?

On PEI right now not only have the prices of homes gone up but rentals have increased as well. I always hear well I can't afford those prices. With the prediction that homes will be decreasing hopefully by 2022 it's a good time to start getting ready to buy a home. A lot of times people want to buy a home but need to do a few things before hand. This is a great time to start gearing up and getting ready. Here are my top three things you should be doing:

1. Monitor your credit score. A lot of people use programs like Credit Karma but keep in mind this is a transunion score. Mortgages use an equifax score. Usually whatever your transunion score is it is 20-60 points lower for the equifax score. I have great programs you can use to monitor your score and it won't affect your credit! Past bankruptcies, no problem let's discuss!

2. Save for the down payment and closing cost. Right now, there are programs that will help you pay for your down payment so if you are eligible for these programs this part may not pertain to you. Usually, with good credit scores and history, you are looking at need 5% down. For the closing cost they range but we always use 1.5% of the purchase price as a way to calculate approximately how much closing cost can run a client. This can sometimes be more or less depending. 

3. Make sure you have at least three trades. Banks and lenders want to see credit history and at least three trades. Some examples of trades are: student loans, cell phones, credit cards, personal loans, auto loans/leases, and so fourth. If you right now have a cell phone in someone else's name and you're sending them the money switch it to your own name to get that history. Your name needs to be on the contract. Can't get a credit card? Get a secure credit card. You put the money on it to use it and it build history as you do. Reach out if you would like more tips or tricks. 

Buying a home can be stressful but it doesn't have to be. Reach out to your mortgage broker today to discuss what you need to do to make buying a home a reality. Mortgage brokers aren't just here to get you the home but to help you be prepared to buy the home. I always hear well I know my credit is bad so I can't buy a home anyways. Let us help you increase that credit. Let's discuss and make a game plan. That is why we are here. So if buying a home is something you want to do either today or in two years, let's talk and get you set on the right path.