Based on the comments, I don’t think my argument is clear. Let’s imagine if you got 100% return annually on a 30 year bond. Would you keep a rental property, or sell it to buy the bond?
Sure, 100% isn’t realistic, but what about 50 or 25? What about 10? How high does the rate have to be for investors to sell the property to trade to the bond? That’s the argument I’m making. Inventory is not the problem. Rates not being high enough to be a viable alternative is the problem. There’s plenty of potential inventory that’s sucked up by investors who will trade up for the right yield on bonds. We just need to get rates to that level.
I get what you're saying, why would a property investor continue to hold property when they can achieve higher returns in a less risky investment in the near term? And that might be true for an investor sitting on cash making a decision of whether to buy property or a bond today. Though in reality a 30 year treasury bond currently offers 3.9% and is subject to federal income tax. It's a negative return after tax and current inflation.
It's a bit more complicated for a current property owner. In your example, an investor should compare the after tax 30 year ROE of the hypothetical property and 30 year bond. In theory the property should provide a higher return than a bond due to the additional risk and reduced liquidity associated with owning the property. The property can also be leveraged quite heavily, which can magnify the ROE when the cost of debt < cap rate. Retail investors generally don't have access to leverage against their bond holdings. Property also offers a depreciation tax shield. No such tax shield for bonds, though there are some bonds that are exempt from or defer certain taxes (though typically their yields adjust downward for these features). Property also offers the ability to raise rents. Treasury bond interest payments (or accruals) are a fixed % of face value.
You might have a better argument if you're talking about an FCB sitting on big unrealized gains from their property purchases a few years ago. Even if you can show that person they should sell and buy a US freedom(TM) bond for a higher safer yield, you're going to run into other challenges like cultural preferences for property.
The powers that be are in a pickle. They created an interest rate environment that allowed so many US property owners to purchase or refinance into lifetime low rates. They flooded people's & businesses' bank accounts with free money. They increased M2 money supply by over 40% in just 2 years. They said inflation was transitory. Now they say they can engineer a soft landing.
Edit: Also, rates don't exist in a vacuum for mortgages or bonds. Who holds a significant amount of debt instruments (aside from the fed)? Investors, particularly banks, insurance companies, and pension funds. What happens to the market value of existing debt instruments when new debt provides higher yields? The market value of existing debt declines. Some banks already have negative equity when they measure their investments at market value. It's not too much of a problem if they can hold the investments to maturity, but it does create other problems, especially if they need to raise cash or pay a higher yield to keep deposits from leaving. Insurance companies have reserve requirements, and the value of their reserves have already declined substantially. Pension funds have to raise cash to pay out benefits and also have funding requirements. All of these major financial players can run into serious problems if they're forced to liquidate holdings with large unrealized losses. Forced liquidations can lead to a cascade of falling prices, triggering other forced liquidations, leading to more falling prices... Hiking the long end of the yield curve too quickly can cause systemic failures.