If you are planning to purchase a home in Prince Edward Island (PEI), you’d be well-advised to do a little homework before you seal the deal on a real estate transaction. Among all things that you buy in your lifetime, a home will likely be the most expensive.
Considering how much you’ll be spending on a home purchase, you’d be doing yourself a favour by getting familiar with the housing market in PEI and ensuring that your finances are in order.
Home prices in PEI may not be as high as they are in other provinces, but they’ll still run you a few hundred thousand dollars. That’s a big payment to make, so you want to make sure you’re making a sound purchasing decision before signing on the dotted line.
Let’s take a closer look at the average home price in PEI right now, as well as what you should do to make sure you’re spending within your means.
What Factors Affect Home Prices?
There are several factors that impact how much a home will sell for at any given time, including the following:
The Type Of Market You’re In
When it comes to prices of homes — or any other type of product — it’s all about supply and demand. When supply is low and demand is high, the prices of homes will be higher. But when there’s plenty of supply to go around and not much demand from buyers, the prices of homes will be more sluggish.
A seller’s market is one in which housing inventory is very tight compared to the number of buyers on the prowl for a new home. More buyers looking for a home and few homes on the market will drive prices up. On the other hand, if there aren’t as many buyers actively searching for a home but there are plenty of homes on the market to go around, there isn’t enough demand to justify higher prices.
The Labour Market
When unemployment is low and wages are high, people have more money to spend. In this case, more people are in a better position to be able to afford a home purchase, which can fuel more demand for homes and increase home prices.
But when the job market is suffering, people will have less money to spend, especially on major purchases like real estate. In this situation, the demand isn’t as strong, which doesn’t justify an increase in home prices and keeps them lower.
Mortgage Interest Rates
Not only does the actual sale price of a home impact how much a buyer will spend when they purchase real estate, but so does the interest rate. The higher the rate, the more you will pay for your mortgage overall. That’s why it’s ideal to secure a lower mortgage interest rate in order to save money over the life of your loan.
During times of high mortgage interest rates, affordability can suffer. As such, the demand for housing can weaken, as there will be fewer people who would be able to afford a home purchase based on inflated interest rates.
On the other hand, a low interest rate environment can spark demand for housing, as it makes home buying more affordable. In this case, the demand for housing can increase, which can also drive up prices.
Have a low credit score but still looking to get approved for your first home? Learn more about subprime mortgages.
When it comes to the value of real estate, location plays a crucial role. The location of a home is perhaps the most important thing that will influence the price that it can command. The exact same home in two different locations will fetch two different prices.
Age And Condition Of The Home
Homes that are newer and in better condition are considered more valuable than homes that are aging and in dire need of upgrading. As such, the price you pay for a home will be impacted in part by the age and condition of the property.
Size Of The Home
A home with more square footage will generally be more expensive to build given all the extra materials and finishes required. As such, a larger home will command a higher price than a smaller home in the same neighbourhood.
Certain features are considered more desirable than others, and buyers may be more inclined to pay more for these traits. For instance, granite countertops in the kitchen and hardwood flooring throughout a home hold greater value than cheap linoleum counters and carpeting. As such, a home with higher-end features may be more expensive than a home with cheaper finishes.
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Average Home Prices In PEI
In PEI, the average home price currently sits at $309,031 as of December 2020. That’s a 21.2% increase from the same time last year when the average province-wide price for a home was $255,063.
Check out the hidden costs of buying a house.
Comparing Average House Prices By Province
|Home Prices 2019||Home Prices 2020||Year-Over-Year % Change|
|Newfoundland and Labrador||$267,500||$281,900||5.4%|
|Prince Edward Island||$255,063||$309.031||21.2%|
Home Prices In PEI Compared To The Rest Of Canada
PEI’s average home price is much lower than the nation-wide average. While the average home price in PEI is currently $309,031, as mentioned above, Canada’s average home price is $603,344.
That said, PEI’s home prices have increased at a much faster pace than they have Canada-wide. While PEI’s home prices increased 21.2% year-over-year, Canada’s home price increase over the same time period was 13.8%.
What Is Driving The Increase In Home Prices In PEI?
It’s difficult to ignore the incredible gains made in housing markets across the province of PEI. An increase of 21.2% in home prices in one year is pretty remarkable. But what exactly is driving prices up so quickly?
The housing market in PEI, and particularly in Charlottetown, is currently a seller’s market. This is evident as the demand and upward pressure on home prices continue. Many buyers are not only PEI residents, but are also coming from other provinces.
Factors influencing the spike in demand for housing in PEI include the increase in remote work, the need for more space, the desire for less urban density, and lower prices. But while home prices in PEI are certainly much lower relative to other provinces and cities across Canada, they’ve skyrocketed over recent months.
How Much Should You Spend On A Home Purchase In PEI?
You’ll need to work within your budget when buying a house in order to make sure that you can not only afford the purchase, but also won’t wind up “house poor.” Even though your income may support a large purchase, you still want to have enough money left over to spend on other things besides your mortgage and all other expenses that come with owning a home.
Here are some things to consider when determining how to spend on a home in PEI.
Get Pre-Approved For A Mortgage
One of the first things you should do before you start your search for a new home is to get pre-approved for a mortgage. By getting pre-approved, you’ll give your lender a chance to review your financial profile and assess your ability to hold a mortgage of a certain size.
Based on the financial information you provide to the lender, you may be pre-approved for a certain loan amount. You can then use this figure to narrow down the properties that you visit so that they all fall within your budget. Having a dollar figure in mind when searching listings will help give you a clear idea of the maximum amount you can spend on a home purchase, which can help you avoid wasting time and frustration.
That said, you should avoid spending the maximum pre-approved amount as stipulated in your pre-approval letter. Instead, you should give yourself some wiggle room so you don’t put too much pressure on your finances to cover a big mortgage.
Make A List Of All Your Expenses
Your income will largely influence how much you can afford to pay in mortgage payments, but your current expenses will also play a key role. Whatever is leftover from your earnings after you’ve paid all of your expenses should be used to gauge how much you can afford to dedicate to mortgage payments. As such, you should make a list of all of your current expenses to see how much money goes out every month.
Typical monthly expenses can include:
- Credit card bills
- Car loans
- Car insurance
- Student loans
- Personal loans
- Miscellaneous expenses
Add up all these expenses and deduct that figure from your monthly income to determine how much you can realistically dedicate to mortgage payments.
Determine Your Debt Service Ratio
Your debt service ratio refers to all of your debt that you are responsible for paying relative to your monthly income. There are two specific debt service ratios that you will want to get familiar with:
Gross Debt Service (GDS) Ratio
This figure is a measure of your principal, interest, and taxes relative to your income. Your GDS should not be any more than 30% to 35% in order to increase your chances of getting approved for a mortgage.
Total Debt Service (TDS) Ratio
This figure is a measure of all of your debt — including debt related to housing — that you must pay every month relative to your income. Your TDS should not be any more than 42% to get approved for a home loan.
Your mortgage lender will consider your GDS and TDS ratios to assess your ability to secure a mortgage and the loan amount that you may get approved for. With this information in mind, you’ll have a much clearer idea of how much you can afford to spend on a home purchase in PEI.
What Costs Are Associated With Owning A Home In PEI?
Aside from your mortgage payments, there are other costs that come with owning a home in PEI, including the following:
- Property taxes
- Home insurance
- Condo fees
Make sure that you not only have enough money in the pot to cover your mortgage payments, but that you also have plenty left over to cover these costs of homeownership.
The prices of homes in PEI are pretty affordable compared to other provinces, as well as Canada’s average. That said, you’re still dealing with a few hundred thousand dollars. Don’t start looking for a home to buy until you’ve taken some time to get familiar with the cost of homes in PEI, as well as in each city across the province. Make sure that your finances are in order so you have the certainty of knowing how much you can comfortably afford in a home purchase in PEI.