Almost all of Australia’s broad money supply is created by commercial banks when they issue loans, and housing now absorbs 62 per cent of that lending, research published this week by Digital Media & Co has found.
The findings appear in the first issue of The Balance Sheet, a research series examining liquidity, housing, capital markets and the Australian economy. Drawing on Reserve Bank financial aggregates, ABS inflation data and central bank balance sheets from 2007 to 2026, the report explores how rapid mortgage lending and broad money growth may have contributed to the persistent rise in living costs and asset prices over the past decade.
Reserve Bank figures for April 2026 put broad money, measured by M3, at a record $3,449 billion. The money base, the portion created directly by the central bank, stood at $293 billion.
“Roughly nine in every ten dollars is therefore commercial bank deposit money, created when banks extend loans; physical cash is about 3 per cent of the total,” the report says. “This is not a heterodox claim: it is the standard description of money creation used by the RBA and the Bank of England alike.”
Housing dominates that lending. Mortgages account for about $2.4 trillion of Australia’s $3.9 trillion in total credit, or 62 per cent, while business credit represents 34 per cent and personal lending 4 per cent. In 1991, housing accounted for about 30 per cent of bank lending. Its share has doubled over the past generation.
Credit growth has accelerated again. Broad money grew 8.2 per cent in the year to April, housing credit rose 7.5 per cent, and lending to property investors climbed 10.2 per cent, the first double-digit annual increase since 2015. Against that backdrop, the banking regulator APRA introduced debt-to-income caps on new mortgage lending in February.
The research also examined a claim that has become common in macro investing: that equity markets are driven overwhelmingly by global liquidity, with reported correlations above 95 per cent between central bank balance sheets and major sharemarket indices. The report compared the combined balance sheets of the US Federal Reserve, the European Central Bank and the Bank of Japan with Australian share prices between 2009 and 2026.
At first glance, the relationship appeared strong. The two series produced a correlation of 0.83. The researchers then applied the same methodology to a computer-generated random sequence with an upward trend, a series with no underlying economic relationship. It produced a correlation of 0.86, higher than the real one.
The report argues this illustrates a well-known statistical problem. Any two measures that trend upward over time can appear highly correlated, even where no meaningful relationship exists.
When the analysis was repeated using growth rates, which remove the shared long-term trend, the relationship between global liquidity and Australian share prices weakened to about 0.25, with liquidity leading by nine to twelve months.
Over the past two and a half years the two measures have moved in different directions. The ASX 200 reached a record 9,202.9 in late February 2026 while the combined balance sheets of the three major central banks, measured in US dollars, remained near decade lows. The index then fell 10.2 per cent during the March correction following the outbreak of the Middle East conflict.
The report suggests one explanation lies in the structure of Australia’s sharemarket. Unlike the Nasdaq, the ASX is heavily weighted towards banks and mining companies rather than technology firms. Mining stocks respond largely to Chinese demand and commodity prices, while banks remain closely linked to domestic credit growth, which has continued at around 8 per cent even as overseas liquidity flattened.
One overseas development is also highlighted. Federal Reserve assets reached a low of about US$6.54 trillion in December 2025 before increasing by roughly US$190 billion from February, ending more than three years of balance sheet contraction.
The domestic findings bear more directly on household budgets.
Broad money in Australia has grown by about 90 per cent since 2015, while consumer prices have risen 33 per cent. House prices and even the cost of a flat white have climbed much faster, raising questions about where newly created money is flowing
Since 2012, growth in Australian broad money has led consumer price inflation by about 18 months, with a correlation of 0.58 over that period. The surge in money growth during the pandemic, which peaked above 12 per cent in early 2021, was followed about 18 months later by inflation reaching 7.8 per cent in late 2022. Money growth is currently running above 8 per cent while headline inflation stands at 4 per cent and underlying inflation at 3.6 per cent.
The relationship is not constant. Between 2012 and 2019, money growth averaged between 6 and 10 per cent while inflation remained below 2 per cent.
“Money growth is informative when it moves violently; in quieter periods the marginal dollar flowed into asset prices rather than the consumer basket,” the report says.
That observation underpins the study’s central comparison.
Between 2015 and 2026, the Consumer Price Index increased by about 33 per cent while broad money expanded by roughly 90 per cent. Melbourne dwelling values rose 41 per cent, the weakest performance among the capitals, while Brisbane, Perth and Adelaide approximately doubled. The average price of a cup of coffee increased from $3.43 in 2015, according to the Gilkatho Cappuccino Index, to between $5.50 and $6 today, with $7 coffees forecast this year.
The report argues much of the difference between money growth and consumer inflation was reflected in asset prices, particularly residential land.
Businesses operating from commercial premises ultimately face higher rents, financing costs and wages, all of which can feed into consumer prices.
“A café’s cost base is saturated with land: commercial rent, staff who must live within commuting distance, insurance priced off rebuild costs, and fit-outs priced off construction,” the report says.
The study also identifies several important qualifications.
Mortgage interest has been excluded from the CPI since its redesign in 1998, while land purchases are treated as asset transactions rather than consumption. House price inflation therefore reaches the CPI only indirectly through rents, construction costs and commercial property expenses. Rents are currently rising 3.6 per cent, below headline inflation. Electricity prices, which increased 21.1 per cent following the withdrawal of government rebates, and the oil shock associated with the Iran conflict have also contributed materially to recent inflation. Coffee prices have likewise been influenced by record green bean prices and award wage increases.
“The defensible claim is that housing-driven money creation sets the domestic cost floor over the medium term, not that it explains any single price in any single year,” the report says.
The report also draws on work by economist Richard Werner and research published by the Bank for International Settlements, which argues that mortgage credit tends to inflate land and housing prices before those costs feed through into rents, construction expenses and wage demands.
It concludes that Australia’s monetary story is increasingly a credit story rather than simply one of central bank policy.
“Understanding where credit is created, and where it flows, may be as important as following interest rates or overseas central banks.”
This report is based on publicly available data and analysis. It is not financial advice and should not be relied on for investment decisions. Every effort has been made to ensure accuracy. If you spot any factual error, calculation issue or omission, please email sid@indiansun.com.au so it can be reviewed and corrected if necessary.
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