There Is Never Just One Cockroach

The piece below is reprinted with permission from Melody Wright.

Bathla, one of Australia's largest "affordable home" builders, has collapsed owing creditors approximately $3.4B AUD/$2.5B U.S., leaving 2,000 apartments in limbo and putting a 14,000 home pipeline in jeopardy.

The company was contending with a slowdown in sales amid a real estate slump, at the same time that construction and funding costs were increasing.

Bathla has borrowed heavily in the private credit market and the nation's securities regulator last week said the situation has "extraordinary complexity."

"There is no question it is showing cracks" in private credit, Church said. "It doesn't look like good custodians of capital."

You may be wondering why we should care about Australia's private credit problems or its housing market, but the financial system is global and interconnected. Additionally, what happens in other countries can be a helpful mirror to understand events in our own country. "Extraordinary complexity" is a feature of private credit, not a bug. As the banks pulled back after the GFC due to Basel III and restrictive regulatory policy, private credit sayshay'd right on in to take their place. The banks who did not want to be completely left out, decided instead to eschew Main Street and lend to the new lenders. To protect their balance sheets, the banks offloaded their risk through synthetic risk transfer securitizations. H/T: Adam Josephson

Non-depository financial institutions (NDFI) aka nonbanks, not consumers, have been the beneficiaries of this lending. This is why some call private credit the subprime of this cycle. This however does not mean that the banks are completely insulated here or in Australia.

While the major banks have avoided lending directly to Bathla, they count small and medium-sized construction businesses now owed hundreds of millions of dollars by the collapsed developer as customers.

Whose firm manages about $20 billion and is an investor in all the major banks. "I think provisions will trend up," Hershan added.

Ripples in credit have a way of spreading in ways that can at first be undetectable to the inexperienced eye. I have personally been digging into those synthetic risk transfer securitizations. Not only are they very complex, but they aren't as risk-free as the market would like to think. The entire system is connected and trouble in one remote corner can quickly spread, especially when it comes to real estate. Many central planners turned to real estate as a way to build out of the Covid crisis. This is why we were all strong-armed into believing we had an inventory shortage.

The housing market, hand-in-hand with the wealth effect, has been used to help us out of every crisis in recent memory. And, no, it wasn't just in the United States. The richie riches were sooooo excited about real estate in Australia, especially as a so-called inflation hedge. According to the above-linked article there is no shortage of demand for new homes. One wonders, then, why home prices in Australia are falling.

For the past three decades, buying a home in Sydney has been the surest bet in Australia. Rising prices have enriched families and made property the engine of household wealth. Now the boom is under threat, and the consequences are rippling across the financial system.

Home values are sliding as borrowing costs rise and buyers react to the removal of tax incentives favoring property investments in the May budget. In Sydney, prices are down about 7% from their peak in February, according to the latest figures from property consultancy Cotality. Declines that started in the priciest neighborhoods (my emphasis) are spreading nationwide, with home values falling in 93% of suburbs in Australia's capital cities.

Borrowing costs in Australia have risen like they have in many countries. Unlike the United States, Australia mortgages "predominantly feature both variable and fixed interest rate options, with variable rate loans dominating offerings." The Reserve Bank of Australia cut rates in 2025 but raised rates by 25 basis points in February, March and May 2026. The Bank paused its hikes in June, but the market is now pricing in a 70% chance that the Reserve Bank will hike again at its next meeting at the end of September. Due to the predominance of variable rate mortgages in Australia, central bank moves can directly impact existing borrowers.

Increased borrowing costs and the elimination of tax credits on investment properties have doused cold water on the once-blazing-hot property market.

If you don't know, when it comes to residential real estate, Sydney is the second-most expensive city in the world behind Hong Kong, which makes it also a locus for wealthy individuals to park their money (legally and illegally). A "whopping 67 per cent of the more than 40,000 Australian residential properties registered as foreign owned are linked to buyers from China." As you may be aware, China is experiencing its own housing market woes. From expensive handbags to luxury real estate, the affluent Chinese buyer has done much to prop up the global economy until recently. As troubles in the housing market in China increased, buying of luxury items and real estate decreased.

While many in the media in the United States pointed to the tariff terror as to why foreign buyers retreated from our market, the culprit is much more likely economic concerns across the globe that have been recently exacerbated by higher energy prices. In fact, in the United States, the number of foreign buyer home sales is down -14% YoY and the dollar volume is down by -19% according to the National Association of Realtors (NAR).

As I started to see sales increase in California and prices drop, I heard anecdotal tales that some Chinese buyers were fleeing. Due to the lack of transparency in California property records, the anecdata is impossible for me to verify through public record. Nonetheless, the amount of luxury that is sitting in California and other hotspots across the country supports this thesis. Unlike Australia, though, luxury prices in the United States are not dragging the market down. In fact, according to Redfin, the median sales price for luxury homes in the United States is up 5.34% YoY in July. Today's post will focus on the luxury property market in the United States, its drivers and relevant metrics, as well as why I think things in the luxury market will soon change, impacting the larger U.S. market as a whole.

Additionally, my colleague and friend, Catherine Cashmore, writer and editor for the Land Cycle Investor in Australia, will provide her boots-on-the-ground analysis of what's going on in Australia. Catherine is the reason I first started studying the 18-year land cycle. For over a decade now, she has been focused on 2027, so you will want to hear her view on what's next for home prices in Australia as we may also soon be looking into this mirror.

The WRR, the Netherlands' own scientific council advising government on economic policy, has now said publicly what we have been saying for two years: the world has changed. This is not a fringe view anymore. It is showing up in the advice governments are getting from their own institutions, and it will have a substantial impact on how, and where, we invest from here.

The United States has already turned away from the global trading system it built after the war. Now Europe has to decide how it deals with a Chinese export machine running at full tilt, the same machine that has already hollowed out other industries and is now doing it to European car manufacturing. The real question is whether Europe has learned anything from watching the US make the opposite mistake: giving China a free run destroys your own manufacturing base and your capacity to defend yourself. That leaves Europe badly exposed on a second front too, a Russia that has made no secret of where its allegiances sit. This is one we will be watching and reporting on for months to come.

Nassim Taleb's minority rule describes how a small, determined minority can end up dictating outcomes for the majority, because the majority is flexible and the minority is not. It is a useful lens for what is happening with immigration right now. Tension is rising across Europe, Asia and here in Australia, and the political system is starting to respond. Germany's Saxony-Anhalt state election this week is a live data point: the AfD took 44.2% of the vote, more than double the CDU's share, a result its leadership called an unambiguous mandate. Whatever your read on the politics, it is a real signal of how fast sentiment is shifting.

Underneath the politics sits a demographic fact worth sitting with: the world now has more people over 65 than children under 5, a first in recorded history. Combine ageing populations with tightening immigration policy in country after country, and the honest expectation is higher prices and higher inflation as labour gets scarcer. Technology may help offset some of that, but we are in genuinely uncharted territory here. One consequence worth watching: as labour shortages bite, companies have every incentive to become structurally more capital intensive and less labour intensive, leaning harder into automation and technology simply to keep functioning.

Here is the argument in its simplest form. For house prices to keep outrunning wages, the money to fund that gap has to come from somewhere, and that somewhere is debt. But debt cannot grow endlessly, especially when it is funding an unproductive asset purchase rather than something that generates its own return. At some point the numbers simply stop making sense. There is a hard ceiling on how much can be repaid out of total wages, and once repayments climb high enough, they start dragging on economic growth and employment, unless business or government step in to replace that demand. Japan shows what the alternative looks like: large, sustained government deficits while the private sector spends decades paying down the debt built up during its own bubble.

None of that is sustainable indefinitely, and the RBA's own trust survey shows how the public is processing it. People broadly trust the RBA, and trust runs higher among those with more economic knowledge. But three things stand out. Inflation is the number one economic concern by a large margin, well ahead of housing, interest rates and everything else. Higher trust in the RBA correlates with lower inflation expectations, which suggests people who trust the institution are confident it can hold inflation inside its 2 to 3% target. And there are real, fundamental gaps in how people understand monetary policy, particularly the mechanics of how interest rates are supposed to affect inflation. Quite a few survey respondents believe higher rates lead to higher inflation.

Our own view is that inflation is best understood as a supply, or cost-push, problem rather than a demand, or demand-pull, one, and that the standard rate-hike playbook does not always work the way it is assumed to. Think about older Australians holding cash and bonds. When the RBA lifts rates, their income from that cash and those bonds rises, and a good portion of that extra income gets spent, which is itself inflationary. It is a genuine gap in the transmission mechanism the textbook version of monetary policy tends to gloss over.

This week's podcast What's Your Edge segment walked through a Crestmont Research piece by Ed Easterling called Half and Half: Why Rowing Works. It compares a buy-and-hold investor in the S&P 500 from January 2000 to December 2025 against a hypothetical portfolio that only captures half of every move up and half of every move down.

This week's podcast, Grey Swans, builds directly on this. The Shiller CAPE currently sits at 39.5, in the top fifth of all readings since 1870 and 76% above its own regression line, second only to the 1999 to 2000 peak of 44.2. The point of tracking the CAPE is not to call the exact top. It is to turn an unpredictable Black Swan into a Grey Swan, an event you cannot time but can see coming, so you are never forced to be all in or all out. A 50% loss wipes out 100% of a prior gain and then demands a full doubling just to get back to even. That asymmetry is the entire reason the geometric return, not the average, is the number that actually matters.

See Chapter One for the full story on Bathla and what its collapse signals for private credit, in Melody Wright's own words.

This week's full show notes cover the Middle East turning more dangerous by the week, why Canadian and New Zealand property are showing Australia its own future two years early, and the full breakdown of the geometric return, the number that actually decides whether you compound wealth or just watch it round-trip.

We will continue to update the sector scorecards, momentum indicators and macro notes as these themes unfold. If conditions shift, you will see it reflected in the Wells calls, Signals and Noise Premium updates and portfolio insights.