The influence of uncertainty on house builder behaviour and residential land values

Abstract

House builders are the interface between the land and housing markets, determining present land values by forecasting future house prices and construction costs. The literature establishes that land values are derived from house prices and construction costs but that this relationship may be altered by uncertainty, yet very little analysis has been provided to establish this empirically. A model of house builder behaviour is proposed and tested through detailed empirical analysis of a sample of private house building projects. Methods of estimating the development values and costs associated with individual sites are set out and rates of achieved profit are estimated. Using simulation methods, the paper demonstrates the effects of house builders' forecasting behaviour on land values, and evidence is presented that house builders' behaviour in the land and housing markets depresses the price of land. It is concluded that house builders tend to forecast conservatively with the result that land is undervalued.