Will land development time restriction reduce land price? The perspective of American call options

Abstract

Land speculation can increase idle or inefficient land use, thus causing a number of problems, which many countries around the world address with reasonable administrative intervention. According to China’s “Disposal Measures for Idle Land”, the land development time is limited to two years. If this time is exceeded, the government will restore the land use rights to the state without compensation for the developer.11China's “Disposal Measures for Idle Land” was adopted in 1999 and was revised and implemented on July 1, 2012. The second clause defines “vacant land” and stipulates the disposal method for vacant land in Article 14: Land idleness fees shall be paid at 20% of the land transfer or allocation price if the project has not been started for one year. The idle land fee shall not be included in the production cost. If the project has not been started in two years, the municipal and county land and resources authorities shall recover the right to use the state-owned construction land without compensation. Source: Ministry of Land and Resources of the People's Republic of China www.mlr.gov.cn/zwgk/zytz/201206/t20120607_1107632.htm. Using the perspective of American call options, this study combines the Optimal Stopping Time and the Martingale Theory in Real Option Pricing Theory. Both land and house price data from 2010 to 2016 have been integrated for Beijing, Wuhan, and Nanning in China. Furthermore, an empirical analysis of the optimal stopping time for land development has been conducted in these three cities to study whether the imposed limit on land development time reduces land prices. The results show that the optimal stop-time fluctuation of land development is large due to factors such as house price and land price volatility as well as social rates of return. In addition, the optimal stopping time for land development differs in specific regions and periods of different levels of economic development. Limiting the land development time will sometimes lower the land price and exert a stronger impact on low-price areas. Although limiting the land development time can help certain areas to reduce idle land, the suppression of land speculation and the stabilization of land prices are not obvious. This strategy will, however, obstruct the development of real estate economy. The conclusions of this study will help the government to formulate a sound policy, control land speculation, improve land use efficiency, and reduce the occurrence of land waste.