Introduction
Australia’s housing affordability crisis is often blamed on interest rates, zoning laws, or immigration. But there’s a hidden engine driving inequality in our property market: the Cantillon Effect.
Named after an 18th-century irish-french economist (Source), this principle explains why new money inflates housing prices for the wealthy first—while the rest of us pay the price. For homeowners, first-time buyers, and even renters, understanding this dynamic is the key to navigating (or even out-maneuvering) Australia’s lopsided property market.
What is the Cantillon Effect?
Imagine a government announces a stimulus package. Banks get the funds first, using them to issue cheap mortgages or buy property. By the time the money trickles down to wage earners, prices have already skyrocketed.
That’s the Cantillon Effect in action: those closest to the money trough (banks, investors) gorge on cheap assets, while everyone else gets leftovers—and higher bills.
How Does the Cantillon Effect Work in Practice?
When new money enters the economy, usually through central banks via monetary policies like lowering interest rates or quantitative easing, it initially flows to major financial institutions and large investors.
These groups use this new money to buy assets such as real estate, stocks, and bonds. This initial spending drives up asset prices significantly, benefiting those who own these assets early on.
As money circulates further, reaching the broader population, prices of goods and services begin to rise due to increased demand. However, ordinary workers often see delayed or smaller wage increases, meaning their purchasing power decreases relative to asset price inflation. So, people farthest from the new money source experience rising living costs without equivalent income gains.
During COVID, the RBA slashed rates to 0.1% and pumped around $200 billion into the economy (Source). Investors pounced, borrowing cheaply to snap up properties. Result? Sydney home prices jumped 27% in 18 months—while wages grew just 2.3%.
Why is the Cantillon Effect Important for Australian Housing?
This isn’t just about economics—it’s about who wins and who loses. When the RBA prints money, it doesn’t rain down evenly. It floods into mortgages and investment portfolios first, pushing prices beyond reach for first-home buyers.
Meanwhile, renters face a double whammy: higher rents (as landlords pass on costs) and fewer affordable homes left to buy. The Cantillon Effect turns housing from a ladder into a treadmill—unless you know how to jump on early.
Conversely, first-time buyers and younger Australians entering the property market experience a disadvantage. As housing prices soar rapidly, wage growth often lags behind, making it increasingly difficult for these groups to afford home ownership. Furthermore, high property prices drive rental costs up, compounding affordability issues for renters as well.
Winners & Losers of the Cantillon Effect in Australia's Housing Market
| Group | Impact | Why? |
|---|---|---|
| 🏆 Winners | ||
| Banks & Financial Institutions | Increased profits from cheap borrowing and expanded lending | Get first access to newly created money, issuing loans at scale |
| Property Investors | Rapid asset appreciation & higher equity | Use cheap credit to buy assets before prices inflate |
| Existing Homeowners | Windfall gains from rising home values | Benefit from market inflation without additional effort |
| 🥵 Losers | ||
| First-Time Buyers | Priced out as deposits become harder to save | Enter market late, face inflated prices & stagnant wages |
| Renters | Higher costs as landlords pass on expenses | No equity to leverage; bear brunt of rising living costs |
| Young Families | Delayed homeownership & financial stress | Compete with investors for limited stock while costs outpace savings |
How to Position Yourself Against the Cantillon Effect
- Be the early bird: Watch for RBA rate cuts or stimulus—that’s your signal to act.
- Diversify beyond bricks: Stocks, REITs, ETFs or even Bitcoin (but really, show me a bitcoin) can hedge against housing inflation.
- Lock and block: Secure fixed-rate mortgages before money-printing lifts rates long-term.
- Become a policy sleuth: Follow RBA announcements like a hawk. (Pro tip: Set Google Alerts for ‘quantitative easing’.)"*
Diversifying your investments across different asset classes can also protect your finances. Rather than solely focusing on property, consider stocks, bonds, or even commodities. Managing debt wisely, particularly mortgage debt, by locking in lower interest rates early, can also shield you from rising costs.
Staying financially literate and economically aware is important here. Regularly review economic indicators, policy decisions, and market conditions to anticipate and adapt to changes swiftly and effectively.
Conclusion
The Cantillon Effect might sound like an obscure economic theory, but its impact on Australia’s housing market is brutally real. It’s the invisible hand pushing prices beyond reach for first-home buyers, the reason your savings can’t keep up with soaring deposits, and the engine driving wealth inequality in our suburbs.
But here’s the good news: understanding this dynamic exists helps you counter its effects. Recognising how money flows—and who benefits first—lets you anticipate shifts instead of just reacting to them.
The housing market isn’t a level playing field, but you don’t have to play by its old rules. Use this knowledge to time your moves, diversify your assets, and lock in opportunities before the ripple effect leaves you behind. Because in an economy where money talks, the loudest voices shouldn’t always be the banks’
FAQ Section
1. What exactly is the Cantillon Effect?
The Cantillon Effect describes how new money entering an economy benefits those closest to its source first, creating unequal wealth distribution.
2. How does the Cantillon Effect directly impact Australian house prices?
When monetary policies inject new money into the economy, it first boosts property prices, benefiting early investors while making affordability tougher for later entrants.
3. Who are typically the winners under the Cantillon Effect in Australia?
Early property investors, banks, financial institutions, and existing property owners who benefit from rapid asset price increases.
4. Who are typically disadvantaged by the Cantillon Effect?
First-time homebuyers, renters, and lower-income individuals who experience rising costs and reduced purchasing power.
5. How can homeowners protect themselves from negative impacts of the Cantillon Effect?
By investing early, diversifying assets, locking in lower interest rates, and regularly monitoring economic policies and market indicators.
6. Why isn’t the Cantillon Effect discussed more widely in property circles?
It's an economic concept not widely understood by the public, often overshadowed by discussions of interest rates, housing supply, and demand.
7. Is there a way to completely avoid the Cantillon Effect?
No, but understanding its dynamics allows you to position yourself strategically, minimising negative effects.
8. How can renters use knowledge of the Cantillon Effect?
By becoming financially literate, considering early entry into affordable markets, or diversifying investments beyond just saving for housing.
9. Does the Cantillon Effect only affect housing?
No, it impacts all assets, including stocks, bonds, and commodities, though housing is often the most visible due to its importance and value.
10. Could this effect ever reverse?
Only with tighter monetary policy or wealth taxes—unlikely soon.
