The RBA is fighting inflation, but is it creating Australia’s next credit crunch?

Australia is in a credit crunch, but not the kind most people remember from the GFC. No bank has collapsed, and no funding market has frozen. Money is still out there. What's gone is the risk appetite.

Lenders are pickier, refinancing takes longer and costs more, and borrowers who assumed they could roll into the next loan are finding the next lender isn't there. I call it a soft credit crunch.

The collapse of Bathla, a nervous bond market and the failed Firmus IPO are all symptoms of the same shift in sentiment. Now the Reserve Bank has raised the cash rate for the fifth time this year to 4.85%, and the property and credit cycles are turning together.

Here's what worries me. Rate rises are meant to cool demand, but this economy's biggest problem is supply. Higher rates make new developments harder to fund, squeeze small businesses and, over time, mean fewer homes get built. We may be fighting today's inflation by creating tomorrow's.

The credit cycle Howard Marks warned about

Few people understand credit cycles better than Howard Marks, co-founder of Oaktree Capital. I've read his memos for years, and more than two decades ago he described a pattern that keeps repeating: prosperity encourages lending, competition erodes standards, losses follow, and lenders pull back.

That's where we are. Years of cheap money and a flood of capital into private credit pushed some managers to chase deployment over discipline. As Marks put it in his April memo, some direct lenders “accepted too much money and invested it too fast”.

His other point matters as much: cycles are driven by people, not just numbers. Investors ignore risk on the way up and overreact on the way down, sometimes pulling money from perfectly sound deals. My read is that the broader market is in the anxiety phase. Parts of private credit are already well into fear.

A credit crunch doesn't mean money disappears. It means lenders stop offering it on yesterday's terms. That's the soft credit crunch: the capital is still there; it just isn't flowing freely.

What has changed at the lending desk

Lenders now want more equity, lower loan-to-value ratios and tighter covenants, and they're valuing security on today's prices, not last year's. Loans written in the good times are maturing into a very different market. The borrowers in trouble aren't necessarily the ones with poor assets; they're the ones whose repayment plan depends on finding another lender. Refinancing is a funding event, not an exit strategy. Good borrowers with a clear way out can still get money, at a price. Projects whose numbers no longer stack up can't. Much of this pressure also points to an inflation problem that interest rates alone can't fix.

The Reserve Bank is fighting the wrong fire.

The Reserve Bank is in a bind. Interest rates are a blunt tool: they work by making borrowing dearer and choking off spending. But much of our inflation comes from the supply side, above all housing, along with government charges and costs that barely respond to rate rises.

Headline inflation hit 4.3% in the year to September. Housing was the biggest contributor, up 5.2%, driven by rents, new dwelling costs, council rates and electricity.

Oil gets much of the political blame, and fuel is part of the story. Petrol prices are up almost 24% over the year, and transport added close to a percentage point to September's headline rate, second only to housing. But the oil shock is showing up in headline inflation far more than in the underlying measure. When Russia invaded Ukraine, Brent crude averaged about US$100 a barrel in 2022, and underlying inflation peaked at 6.8%. Brent has been even higher in recent weeks, averaging around US$124 in October, yet underlying inflation is 3.7%. Rate rises can't bring down the global price of oil, and the domestic inflation that remains is concentrated in housing, the one area where higher rates make the problem worse.

Some of this will ease as demand slows. But no rate rise has ever released more land, sped up a planning approval, made a builder more productive or added a single dwelling. By raising finance costs and killing project feasibility, higher rates can actually make the housing shortage worse.

None of this means the RBA should ignore inflation. It can't. But monetary policy is carrying too much of the load, and government plays a big part.

Public demand is now close to 29% of the economy, against a pre-pandemic average of about 23.5%. Government spending doesn't slow when rates go up, so the Reserve Bank has to lean harder on everyone who responds: mortgage holders, businesses that rely on credit, and developers trying to add housing. Every level of government has also added to costs through taxes, charges, red tape and policies that hold back productivity.

Rates clearly have a role in fighting inflation. My concern is that leaning on them alone, without tackling supply and public spending, delivers more economic pain for less and less benefit. We risk winning today's inflation fight by starving the housing supply we need to win tomorrow's. 

Property: from two speeds to one direction

You can already see the effects in property. The Melbourne Cup Day rise took the cash rate from 4.60% to 4.85%, the fifth increase this year and the highest level since 2008. It wasn't unanimous: three of the nine board members wanted to hold. The RBA concedes that growth is slowing, property prices are falling, and unemployment is rising, yet it still expects inflation to stay above target until late 2027.

The market was already absorbing the first four rises. National dwelling values fell 1.2% in October, the seventh monthly fall in a row, and are now about 6.7% below the March peak. What looked like a two-speed correction is becoming a national one. In October, Brisbane fell 2.0%, Perth 1.7%, Sydney 1.6% and Melbourne 0.8%.

Sydney is now more than 10% below its February peak, and Melbourne is close to 8% below its November 2025 high. Sales volumes, auction clearance rates and consumer sentiment have all weakened, and as usual they turned first: clearance rates have been stuck below 50% since mid-year, and sentiment fell to 80.4 in October.

This matters well beyond house prices. Falling valuations mean lenders advance less, borrowers need more equity, and projects that worked a year ago no longer get funded. The property cycle and the credit cycle start feeding each other.

Where the opportunity lies

Every credit cycle eventually creates opportunity for investors who can tell the difference between falling prices and failing fundamentals. The best openings rarely come when credit is cheap, and competition squeezes returns. They come when capital gets choosy, values reset, and borrowers have to compete for funding.

That doesn't mean you should try to pick the bottom. Nobody can, which is why liquidity and patience are worth so much right now. In private credit, tighter conditions mean better pricing, lower leverage and stronger protections for lenders. But a higher yield isn't the same as a better investment. What counts is asset quality, a realistic valuation, a sound balance sheet, and a credible way out.

For investors, that means backing lenders who have stayed disciplined through the cycle, not the ones promising the highest return. Sitting on cash indefinitely isn't a strategy, but neither is rushing in because rates have gone up. The aim is to keep the flexibility to act when risk and reward line up.

How the cycle ends

Property corrections and credit crunches don't end at the same time. A property correction starts to settle once lower prices bring buyers back. A credit crunch ends only when lenders regain confidence, balance sheets are repaired, and capital is willing to take risk again. That usually takes a lot longer.

For more than a decade, low rates, plentiful liquidity and rising government spending let leverage build and asset prices climb. Now the market is unwinding those excesses. Borrowers will have to cut debt, add more equity, or sell. Some projects won't go ahead, business investment will be curtailed, and some lenders will take losses on decisions made in the good times.

Joseph Schumpeter called it creative destruction: capital moving from weaker hands to more productive ones. It hurts, but it's how markets restore discipline.

Policymakers will be tempted to step in whenever it gets painful. Too much intervention drags out the imbalances the market is trying to fix. The real test is telling necessary market discipline apart from damage caused by policy failures.

As Marks reminds us, cycles are inevitable; what matters is how you behave through them. The lenders who come out strongest won't be the ones who lent the most in the boom. They'll be the ones who cared about security, liquidity and underwriting before the cycle turned. And the investors best placed for the next upswing will be those who protected their capital and recognised when sentiment had gone too far to take the opportunity.

The era of cheap money rewarded leverage. The next era will reward discipline.