Fishing with Dynamite

– David Wanis, June 2026

“The role of the central banker is rather similar to that of a dynamite-wielding fisherman. To slow down an economy … the competent central banker begins to raise short-term interest rates. After all, it’s the only weapon at his disposal. This rise in short-term rates is a bit like the explosion of a stick of dynamite in deep water: it creates a certain number of victims, who slowly rise to the surface. The central bank carefully considers the type and size of the fish that rise. As long as a whale hasn’t surfaced belly-up, the central bank continues to throw sticks of dynamite. When a whale, and preferably a financial whale, rises, the central bank stops raising interest rates and, most of the time, begins to cut them precipitously.”

– Charles Gave, September 2007

In October 2024, when we wrote about why banks are a scale business and why small cap banks are structurally disadvantaged, it was the type of negative credit event impact Judo Capital Holdings (JDO, -40% in June) announced in June 2026 we were thinking of, although not specifically talking about them. After all, you don’t know what deceased sea-life will surface when dynamite fishing. We will leave it to Judo shareholders (we are not one) to figure out whether the credit problems that emerged are due to an evolution of increasing risk limits without appropriate processes, a reflection of the credit cycle turning, or just bad luck. We would observe that their high reliance on broker introduced loans (75%) and rapid growth of their loan book are both factors which have been shown globally to correlate with adverse credit selection and higher risk for banks. Both seem to be at play for Judo.

Credit, like all economic variables, is cyclical. We may have had an extended cycle which has been long enough for investors to forget, and “innovation” in the form of Private Credit to mask what is happening in the depths of the ocean, but eventually all risks show up.

A lot of credit in Australia relates in one form or another to the property market. And cycles in property, like anything else, are heavily influenced by changes in demand and supply. Property related exposures were two of the three bad credits in the Judo update. In 2026 the previously supportive residential property environment has turned sharply for the worse across numerous areas:

Changes in Drivers of Demand:

• Higher interest rates (negative)
• Higher inflation and increased cost of living (negative)
• Changes to Negative Gearing legislation (negative)
• Changes to Capital Gains Tax and SMSF legislation (negative)
• Reduction in bank credit available to residential property investors (negative)
• Restriction of offshore buyers and State Land Tax Surcharges (negative)
• Increasing state taxes on investment properties (negative)
• “Tranche 2” Anti-Money Laundering / Counter-Terrorism Financing (AML/CTF) reforms from July 1, 2026 (negative)
• Net Overseas Migration (positive)
• Full Employment (positive)

Changes in Drivers of Supply:

• Increased credit availability (private credit)
• Increased starts (2025) and construction activity (2026)
• Increased new stock on market (2026/27)

Reduction in demand and increases in supply are having the expected impact:

• Collapse in auction clearance rates
• Increased time on market
• Declining established house prices
• Emerging pockets of distress across residential property developers and construction firms
• Emerging issues in credit markets, from banks (eg: Judo) and private credit fund updates

We are seeing the impact of multiple “weapons” being deployed simultaneously against the demand side of the housing market. Not just RBA rate rises – which don’t specifically target the housing market, after all the RBA mandate is inflation and unemployment – but also changes to federal policy in the much-maligned budget, changes to bank lending calculators, state level increases in property taxes and levies, and AML/CTF changes all impacting demand simultaneously. In addition, the health of the construction and property developer industry – the credit risk taken by a large percentage of private credit funds – has the additional pain of having to wear cost inflation into their developments, increased time on market (which slows asset realisation and increases capitalised interest costs), falling prices, and over the next 6-12 months a significant increase in finished product hitting what could be a very weak market.

To be clear, we do not think a reduction in house prices is a bad thing per se. Creating a speculative asset class from housing stock was never a great idea and rebalancing the market was always going to be painful. We do believe an increased incentive to re-direct non-productive investment from bidding up the value of the existing housing stock into productive commercial endeavours could have been a great way to kick start economic productivity, but other changes in the Federal budget suggest the government doesn’t seem to want this either as they are doing their best to disincentivise it.

Given the movement of property development lending activity away from major banks and into private credit funds, we need to look here for clues. Without detailing specific private credit funds, a review of fund updates with exposure to residential property development has highlighted allocations of some portfolios showing similar signs of the stress Judo alluded to, although they don’t use those words. They say: “identification of project timing and cost overruns”, “facility has been extended and upsized”, “interest continues to accrue on the underlying facility”, “loans are in active management”, “selling performance slower than forecast”. One fund which is in the process of being wound up has a 20% exposure to an equity like tranche with the possibility of zero recovery. Should this hypothetically occur, and investors receive 80 cents in the dollar back, it turns a 7-year IRR from ~8.5% p.a. to closer to 6% p.a. Such is the reality of risk-based investing, where the running yield may not accurately reflect the full cycle total returns of an investment.

ASIC are flagging concerns in this sector through their own direct engagement with funds, observing on 18 June 2026 issues such as: Credit deterioration is emerging unevenly with pockets of higher defaults, impairments, and loan amendments, Macroeconomic pressures, including inflation, rising costs and supply disruptions, are affecting borrower performance, Valuations lagging economic reality. They do note that no stress is appearing in the funds themselves (redemption requests contained, leverage and line of credit usage minimal, liquidity being adequately managed).

Underlying credit observations from multiple sources (Judo, property market data, private credit fund updates, ASIC papers) are all suggesting the dynamite has gone off and what floats to the surface remains unknown. The share price reaction of Judo on the day of their update (down 40%) suggests parts of the market are not pricing the risk that could surface.