The Great Australian Concentration: When Your Biggest Export is Debt
I’ve been mulling over something that’s been nagging at me for a while now, and a recent online discussion really crystallised it: Australia’s economy has essentially become a hedge fund for residential real estate, propped up by a protected banking oligopoly. Four of the top five companies on the ASX 200 are banks – CBA, Westpac, NAB, and ANZ – with BHP being the lone miner in that exclusive club. When you step back and look at it, that’s genuinely bonkers.
Think about it. The biggest corporate assets in this country are literally household liabilities. We’ve built an entire economic structure where the safest, most lucrative investment isn’t innovation, manufacturing, or even services – it’s lending money to Australians so they can buy houses from each other at increasingly eye-watering prices. And we wonder why our productivity has been stagnant for years.
Someone in the discussion called it “the great Australian concentration,” and honestly, that’s the perfect term. The ASX isn’t a bet on our future innovation – it’s a bet on our current debt. CBA is trading at a price-to-earnings ratio of around 28, which is roughly double what US investors pay for JP Morgan. Let that sink in for a moment. We’re paying a massive premium for what is essentially a vanilla home loan business.
The fascinating – and frustrating – part is understanding why this premium exists. It’s not just market madness. There are structural reasons baked into our system that make this concentration almost inevitable.
First, there’s the four pillars policy. Since 1990, our government has essentially locked in a banking oligopoly by preventing mergers between the big four and blocking foreign takeovers. JP Morgan has to compete in a brutal, fragmented global market. CBA operates in a cozy four-player market with massive barriers to entry. Investors pay a premium for that safety, and frankly, can you blame them?
Then there’s franking credits – our dividend imputation system makes bank dividends worth significantly more to local investors than a US bank dividend is to a US investor. It’s a tax quirk that further inflates valuations.
But here’s where it gets really interesting, and this is the bit that’s been keeping me up at night. Basel III banking regulations – the international rules designed to make banks safer after the 2008 crisis – have an unintended consequence in a market like ours. They actually punish banks for being productive.
Under these rules, banks have to hold significantly less capital against a home loan than against a business loan. Someone broke it down brilliantly: to lend $1 million to a residential mortgage, a bank might only need to hold $26,000 in reserve. To lend that same million to a small business or startup, they’d need to keep $105,000. That’s four times more capital locked away for the same amount of lending.
If you’re a bank CEO with finite capital, the math is simple. You can lend $1 million to a brilliant software startup or local manufacturer, or you can lend $4 million across four different home loans for the same regulatory cost. Four sets of fees, four interest streams. The incentive structure is completely skewed.
The logic goes that houses are “safer” collateral because if a business fails, the equipment might be worthless, but a house can always be sold. The catch? By making it four times harder for businesses to get capital, we ensure that the non-housing economy stays small and “risky.” It’s a self-fulfilling prophecy.
Throw in mandatory superannuation – trillions flowing into the system every year – and you’ve got forced buyers who have to park that cash somewhere. In a relatively small market like ours, fund managers end up buying the big four just to deploy the capital. It’s another self-reinforcing cycle driving up valuations because there simply isn’t anywhere else for that volume of money to go.
The comparison with Canada is illuminating. They have a similar economic structure – resource-rich, relatively small population, dominated by a few major banks. Basel III applies there too. But here’s the thing: someone pointed out that back in the 1980s, when Australia’s population was only 15-16 million, we had a far more diverse economy. Manufacturing was 15-20% of GDP. We made cars, white goods, all sorts of things. Population size didn’t stop us then.
What changed wasn’t our geography or our population. It was our policy choices. We shifted toward the great concentration. Our tax code, banking regulations, and competition laws now make sitting on a house more profitable than building a business. We’ve turned our banks into giant, protected pawn shops for real estate rather than venture partners for the next CSL or Atlassian.
Look, I get the counter-argument. We’re ranked pretty high globally in personal wealth, much of that tied up in super and property. Our banks are well-capitalised and tightly regulated. Mortgage default rates are historically low. This isn’t some fragile house of cards about to collapse (probably). And yes, countries tend to specialise in what they’re good at – Norway with energy, Taiwan with semiconductors, us with digging stuff up and lending money.
But here’s what really gets under my skin: we rank 105th in the world on the economic complexity index. That puts us between Botswana and the Ivory Coast. We’re not producing anything of real value beyond holes in the ground and debt instruments. The government just had a royal commission into supermarket price gouging while banks – whose combined profits dwarf Coles and Woolies – continue to operate in their protected bubble with profit margins around 30% compared to supermarkets’ 3%.
Where’s the royal commission into why it’s so bloody hard to get business lending in this country? Where’s the policy push to rebalance these Basel III incentives? Where’s the vision for an economy that doesn’t just trade the same houses back and forth at higher prices?
We’ve got so much talent here, so much potential to innovate and contribute to something beyond being the world’s most sophisticated property speculation market. But instead of investing in that future, we’re doubling down on a system that makes extracting rent from existing assets more profitable than creating new ones.
The thing is, I’m not even anti-bank or anti-housing per se. I own a house myself, and I’m glad our financial system is stable. But stability shouldn’t mean stagnation. Protection shouldn’t mean absence of competition. And an economy built almost entirely on household debt isn’t sustainable in the long term, no matter how many regulatory safeguards we put in place.
We need to start having serious conversations about restructuring these incentives. Maybe that means looking at Basel III risk weights for productive business lending. Maybe it means revisiting the four pillars policy. Maybe it means using our super system to actively fund innovation rather than just piling into the same blue chips. Maybe it means learning from Norway and actually taxing our resource exports properly so we can invest in diversification.
Because right now, we’re not building the future. We’re just refinancing it at increasingly ridiculous valuations.