Undeveloped Land Prices During Urbanization: A Micro-Empirical Study Over Time

Abstract

IN most of the world's urban centers, the price of land has been rising at a rapid rate. In some cases the increases observed have been phenomenal indeed increases of 5 to 7 times in 17 to 20 years, in Israel for example 1but even in more settled areas the increase in the price of land appears to have been considerably greater than the rise in prices generally or in construction. While builders tend to adjust to higher land prices by more intensive land use, such as high-rise buildings, there is evidence that the land component of housing costs is increasing. Considerations of housing policy and equity have focused attention on the growth of land prices here and abroad.2 The relevance of land prices to public investment decisions is also being increasingly recognized. New roads and rapid transit, sewer and water lines, and urban renewal projects yield sizeable benefits (or, in some instances, costs) to adjacent properties. The capitalization of these externalities in land values is a measure of the benefits obtained.3 Finally, land is one of the principal forms of assets held in the economy and one, moreover, in which large speculative gains have sometimes been made. So far the interrelationships between land asset values and the macro variables of the economy have not been closely analyzed. Theory suggests the possibility of effects of the interest rate and certain macro variables on land prices and in turn there may be effects in the opposite direction. Over time, the recorded prices of land transactions reflect an intermingling of various influences. The capitalization of expected returns implies an underlying time path for land prices given expectations and interest rates. Changes in the economy at large -by way of interest rates, business conditions generally and in the real estate market, and construction activity influence land prices. Along with these factors over time, there are the effects of the qualitative characteristics of the land being sold, which are not likely to remain fixed as the development of an urban area proceeds. These effects must be considered simultaneously. This study is an attempt to disentangle the various influences affecting the price of vacant land with particular emphasis on the movement of prices over time. The empirical analysis is based on a body of micro-data, consisting of 1111 land transactions in Northeast Philadelphia over the perod 19451962, together with selected characteristics of the parcels sold at the time of the transactions. These data were collected for an extensive study of the process by which vacant land on the edge of a city goes into urban use, and particularly of factors influencing the rate of development and rise in prices during the process.4