NICK DYRENFURTH & DOMINIC MEAGHER: Banks are pouring capital into property instead of where it’s needed

Australia’s productivity crisis won’t be solved by wringing more hours out of workers or cutting wages or mere deregulation.

As Treasurer Jim Chalmers prepares to convene the economic reform roundtable next week, we need to think about how it can be solved by better directing our capital, skills, and innovation toward building things of lasting value.

That requires a fundamental rethink of how our financial system works and who it works for.

One of the most profitable banking sectors in the world is failing at its most basic nation-building task: funding productive enterprise.

Instead, our banks overwhelmingly prefer to lend against housing — pushing prices higher without building supply — while starving small and medium-sized businesses, start-ups, and new industries of affordable credit.

Mortgage lending accounts for more than 60 per cent of all bank loans. Even when small business loans are secured by the owner’s home, interest rates are on average 1.5 percentage points higher than for large businesses.

Over the past five years, banks have poured $150 billion into the property services sector — triple the amount lent to manufacturing and about 15 times more than into advanced industries we desperately need.

This is not just a misallocation of capital, but a productivity killer. Australia cannot bank its way to prosperity by endlessly refinancing the same houses. Yet this is precisely the cycle we’re stuck in: financial speculation in one part of the economy instead of diverse, productive investment.

The results are clear. Business investment collapsed by almost 7 per cent of GDP under the previous Coalition government, despite historically low interest rates. It has only begun to lift again since Labor returned to office.

But without structural change, capital will continue to flow toward easy, low-risk, high-return real estate plays — leaving the rest of the economy underpowered.

This is why we need to rewire banking for productivity and innovation.

Options include: setting minimum lending ratios to Australian businesses, especially SMEs, relative to total lending; reforming prudential rules to stop penalising start-up and small business loans; supporting community, regional, and mission-driven financial institutions to fill gaps where big banks retreat; expanding public investment vehicles like the Clean Energy Finance Corporation as models for enterprise-focused finance; and increasing transparency so banks report the share of lending going to productive sectors versus property speculation.

The goal is not to micromanage credit decisions but to set clear national priorities. Banking regulation already sets reserve requirements to ensure liquidity; it can also encourage capital to flow to the sectors that will drive future growth.

What does this mean in practice? Imagine if even a fraction of the billions now tied up in speculative property were redirected into advanced manufacturing for housing.

Our manufactured housing sector — where much of the building process occurs off-site — has the potential to cut build times, lower costs, improve energy efficiency, and create high-wage, unionised jobs, especially in the regions.

At present, manufactured housing accounts for just 3 per cent of Australia’s housing output. In Sweden, it represents some 80 per cent of newly built stand-alone homes.

With strategic finance and procurement reforms, Australia could reindustrialise this sector, meet our housing targets, and even develop a high-value export industry. But without finance flowing into the factories, supply chains, and skills pipelines needed, the opportunity will be lost.

That’s why banking reform isn’t a niche financial argument — it’s central to solving our housing crisis, decarbonising industry, and boosting productivity across the board.

A social democratic productivity agenda must democratise access to capital. At present, the people and businesses locked out of affordable finance are often younger Australians, renters, and regional entrepreneurs. The people we need to power the next generation of enterprise.

We’ve done it before. The post-war boom was underpinned by banks, public agencies, and co-operative institutions that actively funded industrial expansion and nation-building projects.

In the 1980s and 90s, Hawke and Keating modernised the economy without sacrificing fairness, creating superannuation funds that now form one of the largest pools of savings in the world.

Those funds prove we can design financial institutions that serve both returns and the public good. Today, with AI, clean energy, advanced manufacturing, and regional revitalisation on the agenda, we need the same boldness.

That means using our banking system not just to make money, but to make innovative things in Australia.

A more innovative nation won’t be built by accident. Redirecting even a small share of capital from speculative property into productive enterprise could lift wages, create secure jobs, expand housing supply, and make our economy more resilient to global shocks. In short: better banking means a stronger, more productive and fairer Australia.

Nick Dyrenfurth is the John Curtin Research Centre’s executive director. Dominic Meagher is its chief economist. They are co-authors of Innovation Nation — Boosting Productivity and the Fair Go in the Age of Artificial Intelligence