Every Country for Themselves

The geopolitical picture this week comes down to one idea: everything is up for negotiation. War changes everything, and the result is that it is now every country for themselves. That is where the confusion and the volatility come from, and neither is likely to settle any time soon.

Underneath the headlines, the gap between perception and reality is widening in China. Falling economic growth and deep structural problems are making real trouble, and Japan is the model that should guide what China has in front of it. The problems that arise from an ageing population, a property bubble and a credit overhang are no more resolvable by a communist government than a capitalist one. Physics does not care about your system of government.

New bank lending in China fell to near zero in July, a sharp deterioration from the multi-trillion renminbi monthly figures that were normal as recently as 2023. Credit creation is the engine of Chinese growth, and the engine is running out of fuel.

For Australia, that matters directly. If China cannot sustain the demand that has driven our export economy for two decades, we need to pivot quickly, and we are already seeing the early moves toward India and other regional partners. At the same time, larger government deficits and defence spending should generate more locally produced economic activity. The shape of the Australian economy is going to change, and that process is already underway.

The rise of the Australian property market has been explained by "fundamentals" like immigration and the lack of supply. We talk often about the role of groupthink, and we think it is just as reasonable an explanation for rising prices as the conventional ones. But it is not very scientific to suggest a simple behavioural heuristic which leads to the action of increased lending. So let us walk through what happens if the music does stop.

Does this mean a sharp collapse? Maybe. But the answer depends on several moving parts, and they do not all point the same way.

The financial position of the holders is the key. If they can withstand a long, slow decline without the need to sell, then prices may simply drift lower over the next decade. If enough of them sell, whether voluntarily or out of necessity, then we may see a steeper fall over a shorter period. But that does not mean we should assume prices then rise again. The old slogan applies: future returns may not resemble past returns.

The demographic picture reinforces the risk. The share of Australians classified as property investors has climbed from under 7% in the late 1990s to about 14% now, roughly 2.3 million active landlords. Ownership has skewed heavily toward older, wealthier cohorts, with those aged 60 and over growing from 14% of investors to roughly 27%. Meanwhile, property ownership among under-30s has fallen by about 13%. Nearly 40% of all housing investors come from the top 20% of income earners. About 70% of landlords own just one investment property, but the remaining 30% hold nearly half of all investment housing stock.

This is general commentary on the Australian property market and its structure, not advice about any specific property or investment decision.

One of the most important ingredients of successful investing is thinking over time, not in the present moment. Most statements about investing and success are static: the long-term average return is 8%, for example. We know that is not the case. The return you actually earn depends heavily on where you start and where you finish, which is just one path chosen from many possible ones.

A recent article discussing lower returns to Australian superannuation sets out some useful examples, but there are a few problems worth naming.

The first is the current debate about whether superannuation is worth it. The "against" argument says workers should be given the money as wages and they can spend it accordingly. The "for" argument says it helps fund retirement. Both positions are static. Neither accounts for the path the money actually takes between now and then.

The second problem is that most Australians dollar-cost average into their super, and by varying amounts over time. That makes it genuinely difficult to make a definitive statement about the success or failure of superannuation as a system. The path matters, and the path is different for every individual.

A world where every country is looking after itself, a Chinese credit engine running cold, an Australian property market whose story is starting to fray, and a superannuation debate that mistakes hindsight for foresight. The common thread is that the assumptions people are relying on, whether about geopolitics, property, or long-term returns, were formed in a different era and may not carry forward. Thinking over time, not in the present moment, is the edge that separates the investors who adapt from the ones who get caught.

As always, this is general information about how we read markets and the economy, not personal advice tailored to your circumstances.