Shift in space
Weekly housing rents are on the rise, as charted by Tim Lawless of CoreLogic (left slide), and partly explained by the Reserve Bank of Australia (in the right slide, which highlighted the decline in the average household size through the pandemic):
Source: CoreLogic, RBA
Property valuer and veteran housing market expert and analyst Greville Prabst questions whether housing prices can or will fall given the tightness of the rental stock (vacancy rates are tracking at around only 1 per cent), rapid rises in land prices and construction costs, and relatively low level of stock for sale:
Risk free rate is reborn
Prabst poses an interesting question, which probably doesn't have a yes/no answer.
It seems quite likely that with the risk free rate having increased then the frothiest, most speculative, most illiquid, and/or lowest yielding assets will be repriced lower.
For example, many of the high-growth tech stocks in the US have lost half or more of their market value over the past six months, as the gigantic punt on the long end of the curve went into reverse.
In the housing context, the upper quartile of the Aussie market - largely accounted for by properties in Sydney and Melbourne - has already experienced price declines, losing ½ per cent in aggregate over the April quarter (the other segments of the market experienced price increases over the quarter).
This dynamic might also in part reflect that the premium end of the housing market tends to transaction via auctions, and therefore price changes are manifested on a more timely basis (h/t @beckyquick83).
Source: CoreLogic
The 10-year bond yield in Australia - which may be taken to be a reasonable proxy for the risk free rate - has increased from a nadir of under 1 per cent following the onset of the pandemic, to around 2 per cent at the beginning of this year, to 3¼ per cent today.
US inflation looking peaky
In the US there is a little more commentary surfacing about inflation potentially having peaked, and with more folks discussing possible interest rate cuts in 2023 bond yields have begun to decline again (the 10-year bond yield is back down to 2¾ per cent over there).
After a record 16 consecutive monthly increases, there was finally a decline in PCE inflation in April, to 6.3 per cent.
In particular, there was a major reversal in non-durable goods (i.e. stuff that perishes quickly), which recorded the biggest drop since May 2020 (and the first negative result since October of that year).
Of course, there's a huge amount of uncertainty in the world right now, and personally I wouldn't be betting on any Fed pause in interest rate hikes any time just yet.
And in Australia, certainly, inflation is set to be a hot topic for some time to come, especially given rising rents and the surge in power prices, both of which are yet to feed through in full.
If bond yields do begin to rise again from here one positive would be a corresponding drop in demand for worthless tokens, bored ape avatars, NFTs of fart jars, and the like.
Bonds have been much out of favour with investors for obvious reasons, with wags famously quipping in the mire of the financial crisis that Treasuries were beginning to offer return-free risk (rather than their conventional risk-free returns).
But if the risk free rate rises back up towards 4 per cent then there will be less of a need for Ponzi schemes and degenerate gambling to protect the value of cash.
