The Cantillon Effect

3rd of July, 2017

In the early 1890’s Australia’s population was approximately 4 million, not bad for a country that still existed as separate states and yet according to many, Australia lay claim to an even more extraordinary fact. Melbourne housed the world’s 3rd tallest building – that’s right! Completed in 1889, the APA Australian Building was a full 12 stories or a massive 53m tall. Now to put that into context, a small colony in the Empire had the pizzazz to build the world’s 3rd tallest building? Amazing I’d say!

However what followed is not dissimilar to the events of the GFC, with Australia in the early 1890’s suffering horrendous falls in both the share and property markets and the onset of a 1930’s styled depression. An enormous contraction in credit occurred with many banks either failing or having their assets frozen until they were recapitalised.

But this brings about the question – Why is it that the world’s tallest buildings are mostly built right at the end of the cycle and basically empty when the ribbon is cut symbolising the opening of the building?

Never thought about it? A few examples-The Empire State Building opened in 1931 (after the 1929 Crash), the World Trade Centre opened 1972/3 (after the 1972/3 recession) and the current one, the Burj Khalifa (Dubai) opened January 2010 (after the GFC). Well it can all be explained by the Cantillon Effect.

Richard Cantillon (1680 – 1734), proposed that a change in the supply of money and credit will affect the economy by changing prices. He went on to say that as credit is extended or increased an expansion in the economy would occur, however, this would ultimately be overdone as prices and imports would continue to rise eventually leading to a bust.

This in a nut shell explains why it is that the tallest buildings are always built when credit is most freely available. By using credit, developers are able to extract the maximum profit (or as I would say extract the largest “Effortless Advantage”) per m2 of land. Just think about it? All other things being equal, if you owned a development site of 3,000m2 on Collins Street, would it be more profitable to build a 2 story or a 40 story office block?

Clearly by building a 40 story office complex you are maximising the use of your 3,000m2 block!

“As a general rule, skyscrapers are a speculative project, built mostly by developers with other people’s money. Such buildings are going to be built only when credit conditions are easing or at their easiest, the time when developers are most flush with funds: hence the link with credit, and to Richard Cantillon.” Anderson

As credit becomes more and more available, developers will continue to try and eke out more and more value from each m2 of land until, finally a Credit Induced Land Bust occurs (ie the GFC in 2008) with credit contracting, making it no longer available for such speculative ventures.

Now you know why the world’s tallest buildings have a habit of opening up in a recession and are initially never fully occupied.

So if you want to turbo charge your finances you need to understand “the Effortless Advantage”. You need to understand within a frame of reference how the Credit and Investment Markets interact. You must know how to act and most importantly WHEN to act.

As investors it is important that we not only chase but capture “the Effortless Advantage” as those that own and control “the Effortless Advantage” will reap far more rewards than the diligent person that does the work.

This is the true road to wealth, controlling, compounding and receiving your “Effortless Advantage” by taking action at the appropriate time.

Ask us how we can help  help you take advantage of the Cantillon Effect and don’t forget to leave your  thoughts below. 

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If you want to avoid the mistakes of not understanding the dangers of investing without an understanding of the Economic Cycle, then why not have a chat to us about how we can help?

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