Ok my bad, it appears to be working correctly but I didn't test it the right way.
I was testing this with the same account which results in updating the quantity only for my account and saying I can't add anymore, so it's not actually updating it for everyone.
I tested it now with 2 different accounts and it is working as it should be. I added the last quantity in 2 different carts/accounts and if one of them checkout and place the order first, then the other user can't proceed and will get an error message saying the quantity is not enough.
This is great! I don't remember it being this way before in PS 1.7.