Ah that's part of the problem, you're using a hole punch. When you use a punch, you're removing a chunk of the leather thereby weakening it. Normally when you see holes like that, they have a metal grommet reinforcing it. What you want is something more like Wolf watcher described, a slit in the leather made with a chisel. What those do is cut the leather a little bit, but mostly shoves it out of the way which means most of the leather is still there (unlike a punch, which removes it completely). When you use a chisel or an iron, the wound you make ends up partially sealing up, especially if once you're done stitching you lightly hammer it with a mallet.