Understanding the short- and long-run relationship between vacant allotment and established house prices

Abstract

Purpose– The purpose of this paper is to address a key issue fundamental to the operation of land and housing markets, that is, the relationship between land and house prices. The study identifies possible causation between established house and vacant allotment prices using the metropolitan area of Adelaide, Australia as a case study.Design/methodology/approach– A key outcome of the study is the construction of a Site Adjusted Land Price Index against which a Quality Adjusted House Price Index is compared.Findings– The results show that there is a lagged effect of land prices on house prices and that this is significant at an interval of eight lag periods. The results also imply that the lead lag relationship between established house and vacant allotment prices is not unidirectional. This suggests that, while a change in house prices leads to a change in land prices in the short-run, the long-run position is for increasing land prices to lead to a delayed increase in house prices.Research limitations/implications– Rising house prices do not simply and solely reflect a shortage of land. There are suggested effects both immediate from house to land and delayed from land to house, particularly in a rising market.Originality/value– The lead lag relationships of both indexes are tested using Granger causality estimates to assess whether theoretical Ricardian concepts still hold in a modern urban land market.