The market is back to grabbing at glimmers of bad news as hints of good news.
The ASX and the Australian dollar crawled off their 11-month lows on Thursday, mainly due to monthly jobs data suggesting a hot US jobs market looks to have cooled a little in September.
That translated into a slight retreat on 10-year bond rates in the US and a modest relief rally on Wall Street despite the continuing chaos on Capitol Hill. Australia tagged along temporarily.
“The structural forces that led us to believe interest rates would be low – they are alive and well,” she told a Fortune CEO conference in Washington.
That was despite the surge in long-term interest rates with yields on 10-year Treasuries hitting the highest level this week since the stirring of the global financial crisis 16 years ago.
According to Yellen, the question of whether bond yields would eventually settle at higher rates is very much on the Biden administration’s mind. Such questions are hardly confined to Washington.
Any decision by the Reserve Bank to raise rates next month would reverberate very badly. On the evidence so far, this move by Bullock seems unlikely.
But the severe pain spreading even deeper into the one-third of households renting only feeds into the inflation figures considered by the RBA.
The latest figures on quarterly rent rises from Domain reinforce the squeeze of record high prices and record low vacancy rates of 0.8 per cent nationally. For the year to September, apartment rents rose well over 20 per cent in Sydney and Melbourne and just under 20 per cent in Brisbane and Perth.
Domain acknowledges the pace of price increases eased over the September quarter with extreme hikes likely ending as the affordability ceiling is reached. But its report notes that even a reduced rate of increase remains very high by historical standards.
“To balance the rental market and achieve a healthy vacancy rate of 2 to 3 per cent, Australia needs 40,000 to 70,000 additional rentals,” says Domain’s Nicola Powell. “There is no quick fix to ease the competitive rental market.
“One of the key factors is investors. They are currently reluctant to hold debt with rising costs, as evidenced by the falling annual investor share of new lending.”
This is also why there is so much talk about growth of a build-to-rent sector, owned by institutional rather than mum-and-dad investors. But most domestic real estate players and superannuation funds have been cautious about large-scale investment in the fledgling sector despite government urging and considerable investment in the asset class offshore.
AXA Investment Managers, based in Paris, for example, is enthusiastic about the sector’s potential in the Australian market. What is known as AXA IM Alts has $35 billion worth of residential investment globally, including a $4 billion portfolio of affordable and social housing.
Australian head Antoine Mesnage argues the risk-adjusted returns in Australia are attractive relative to more traditional sectors.
So far, it has one 400-unit project under way near the Westmead Hospital precinct in Western Sydney in partnership with St George Community Housing and the federal government’s affordable housing agency. Half of the units are designated affordable, meaning rents will be at a 25 per cent discount for means-tested tenants when finished by late next year.
AXA IM Alts is looking for additional projects in Sydney and Melbourne close to employment hubs, transport hubs and where the balance between the cost of land and that of building is similar.
“We are of the strong belief that the underlying fundamentals of rental housing in Australia – and not specific to affordable housing – are underestimated because it’s not a traditional sector,” he says, citing similar forces around the globe.
“Increasing mortgage rates, affordability issues, difficulties in ownership which is increasing the pool of individual households struggling to get proper accommodation, location-wise, quality-wise and size-wise.
“The tailwinds have accelerated with the increase in interest rates but it was already there. The supply-demand imbalance was already strong and all the studies show the shortfall in Australia growing.”
Any fix to that fundamental imbalance will take a long time. And rents will stay high. That at least is a dead set certainty amid general economic confusion.
This is an extract from an article written by Jennifer Hewett for Australian Financial Review, published on 05 October 2023.
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Read the full story: Bullock's Predictable Problem in an Unpredictable World- Australian Financial Review