The argument that speculative property crowds out productive investment is not a new one, and I am not the first person to have made it in an Australian context. The 2025 Founders Series made it at length, and made it, I believe, on well-grounded evidential foundations, the banking balance sheet composition, the lending data, the pattern of capital allocation visible in the gap between residential mortgage volumes and business credit. The intuitive case was strong. When the majority of a nation’s banking system is oriented toward financing the purchase of existing assets from one another, rather than the creation of new productive capacity, the diversion of capital from complexity-building activity is a logical and expected consequence. I do not now believe the intuitive case was wrong. What I believe is that intuition, however well-grounded in evidence, is a different and weaker form of argument than a documented causal mechanism, and that the research that underpins this series has supplied what the 2025 work could not: precisely that mechanism, observed in operation in a comparable economy, through independent empirical analysis.
The mechanism comes from an International Monetary Fund firm-level study of Canada. I will explain shortly why Canada is the relevant comparator. The study’s finding, stated plainly, is this: a protracted housing boom suppresses aggregate productivity not through some general or diffuse crowding-out effect, but through a specific and observable pathway operating at the level of individual firms and their access to bank credit. The pathway is the collateral channel. To understand why the collateral channel matters and why it connects directly to Australia, it is necessary to understand how bank lending decisions actually operate at the firm level, because the mechanism is not one of intent or policy failure; it is the rational outcome of a system operating exactly as designed, in an environment where one asset class dominates the collateral landscape.
Banks do not lend to firms on the basis of their productive potential or the quality of their future output. They lend on the basis of security, the collateral a borrower can offer against the risk of default. Physical assets, and residential or commercial property in particular, represent the collateral category that banks value most reliably: it is observable, standardised, professionally valued, and liquid relative to other asset types. A firm that owns property — a manufacturer with a freehold factory, a retailer with owned premises, a developer with land — can offer that property as security and access credit at terms that reflect the quality of the collateral. A firm whose primary assets are intangible, whose value lies in intellectual property, proprietary software, specialised human capital, or early-stage technology, cannot offer equivalent security, because the banking system’s collateral valuation framework is not designed to price those assets reliably. The consequence is not that intangible-intensive firms are refused credit; it is that they receive credit on materially different terms, at higher rates, in smaller volumes, and subject to conditions that reflect the lending institution’s inability to adequately collateralise the exposure.
The IMF’s firm-level analysis of Canada made this mechanism observable in the data. During Canada’s protracted residential property boom, firms with significant property holdings on their balance sheets — property-rich firms, in the study’s terminology — were able to access bank credit more cheaply and in larger volumes than comparable firms without those holdings. The appreciation of their property assets had expanded their collateral base, which expanded their borrowing capacity, which reduced their cost of capital. The productive content of their operations was not the variable that changed; the value of the collateral they happened to hold was. Intangible-intensive firms, technology developers, advanced manufacturers, firms operating at the knowledge frontier, where intellectual property and human capital constitute the majority of enterprise value, experienced the mirror image: as property values appreciated around them, the relative quality of the collateral they could offer deteriorated, their credit access tightened, and their investment plans were constrained. The study observed this differential across firms in the same industries, controlling for size and other variables, which makes it possible to attribute the effect to the collateral channel specifically rather than to some broader sectoral dynamic. The result, aggregated across the economy, is a measurable suppression of productivity: credit flows toward property-rich firms and away from intangible-intensive firms, and productivity is determined more by who holds property than by who produces most effectively.
The reason Canada is the directly relevant comparator for Australia is not simply geographic proximity to a shared institutional tradition; it is structural similarity of the specific kind that makes the mechanism transferable. Canada and Australia share a comparable economic profile across the variables that matter for this analysis: both are resource-dependent economies with significant extractive sectors that have historically anchored export income; both experienced prolonged residential property booms concentrated in major metropolitan centres; both operate banking systems with high concentration in a small number of major institutions that carry large residential mortgage books; and both face what economists identify as branch-economy risk — the tendency for capital and talent to concentrate in the highest-return domestic sectors (property and resources) at the expense of knowledge-intensive industries that would lift economic complexity. When the IMF’s analysis finds a productivity-suppressing collateral channel operating in Canada, the institutional and structural conditions it identifies as enabling that channel exist in Australia in closely comparable form.
The domestic evidence is consistent with this mechanism operating here. Australia’s residential mortgage book — approximately $2.5 trillion as documented in the preceding pieces — represents roughly twice the volume of all non-financial business lending in the country. The banking balance sheet, in other words, has for many years allocated approximately twice as much capital to the financing of existing residential assets as to the financing of business activity across the entire non-financial economy. The RBA’s own research on capital allocation and business investment has noted the relative thinness of bank lending to the productive sector in the context of overall credit volumes. Neither of these observations proves the collateral channel mechanism in Australia with the same firm-level precision as the Canadian study; they are consistent with it. The Canadian evidence provides the causal architecture; the Australian balance sheet data provides the structural setting in which that architecture operates.
What naming this cost actually means is worth dwelling on, because the mechanism is not a story of intent or negligence. No individual within the banking system, the regulatory apparatus, or the investment community made a decision to suppress Australian productivity by directing capital toward property. The collateral channel operates through the rational decisions of institutions responding to frameworks that were established in a different era for different purposes. The cost is the aggregate of those rational decisions, compounded over time, expressed in the gap between the economic complexity Australia’s industrial base could have built and the complexity it did not. That gap is not visible in a single balance sheet or a single lending decision; it accumulates in the composition of the economy that is left when a generation of capital has been directed by the architecture rather than by productivity. The cost is real. It is now, for the first time, named from outside our own borders by an independent analytical institution examining a comparable economy through a comparable lens. That naming is the beginning of accounting.
The reform architecture is now proposed in Australia’s direction — the tax layer is being reached for, and for the reasons examined in the preceding pieces, this is a meaningful development. But reaching for the tax lever while the prudential lever holds and the collateral channel remains operative raises a question that the transition narrative must confront directly: Does the capital that flows toward productive assets, as it does so, encounter the conditions it needs to deploy effectively, or does it meet an obstacle of a different kind entirely? That is the question the next piece addresses, and the answer is one of the most unexpected findings in the research behind this series.
