01. Causes of Land Value

In part 2 of the explanation the relationship between land values and location was shown to be fundamental, but within that context it is worth noting how land in general or sites in particular may acquire value.  The primary causes affecting land value are:

  1.  Natural advantages.     2. Infrastructure.    3. Population Intensity (agglomeration)    4. The Planning System    5. Security.

The following caveat needs to be mentioned;  that, where the causes of land value are concerned, there is a big difference between urban land and agricultural/rural land.
With urban land, causes 2 – 5 certainly apply, but the first cause, natural advantages is considerably diminished, if not totally absent – as described in the evolutionary process in the diagrammatic explanation of Part 2.  With agricultural land, natural advantages are of course of primary importance, infrastructure less so, population intensity of no significance.  Rural land values are predominately due to the providence of nature, whereas urban land values are essentially man-made.
The influence of the planning system has an effect on both urban and rural land values; a rural site, if designated for urban residential use, will gain enormously in value at the stroke of a planner’s pen. It is this artificial ‘planning gain’ that is currently the subject of much discussion.

Some further qualifications to the above causes should also be noted;

Natural advantages are exceptional in that they are a given; they are unchanging. All the other causes are man-made and are subject to variation.  It is generally assumed that, with these, any increase will give rise to a corresponding increase of land value, and this is generally true, except in the cases of infrastructure and the planning system.  Where infrastructure is concerned it is quite possible that, for particular sites, its introduction may reduce the site values; for instance to properties adjacent to a new by-pass or under the flight path of a new airport runway.  Where planning is concerned, residential property values may well decline where permission is granted for some adjacent industrial or commercial project.  However the general trend for land values to rise due to any or  all the above factors, still holds true.  Rather than the value of a site being due to any one cause, it is more likely to be a combination of causes that go towards the demand to occupy a particular site.  One thing is certain; that the demand for a site determines its value, and that value is affected by location.  Adam Smith, in a chapter on the location of housing, noted that:

‘Ground rents are generally highest in the capital, and in those particular parts of it where there happens to be the greatest demand for houses, whatever be the reason for that demand, whether for trade and business, for pleasure and society, or for mere vanity and fashion.’ (1)

Natural Advantages

These causes are in place at the outset as they are provided by nature and simply need to be recognised to be exploited.  The earliest settlers would establish themselves on the most fertile land with a fresh water source, or at the tidal limit, at the confluence of rivers or where known underground resources were easily accessible.  The benefits of natural advantage are more evident in an agrarian situation, or in an industrial context where it is a question of the exploitation of natural resources.  In this latter case the effect on land values is indirect and is discussed further under ‘Industrial Land Values’.  With later urban development these natural advantages became overtaken by the man-made advantages of infrastructure and agglomeration.

Natural advantages are exceptional in that they are a given; they are unchanging. All the other causes are man-made and are subject to variation.  It is generally assumed that, with these, any increase will give rise to a corresponding increase of land value, and this is generally true, except in the cases of infrastructure and the planning system.  Where infrastructure is concerned it is quite possible that, for particular sites, its introduction may reduce the site values; for instance to properties adjacent to a new by-pass or under the flight path of a new airport runway. Where planning is concerned, residential property values may well decline where permission is granted for some adjacent industrial or commercial project.  However the general trend for land values to rise due to any or all the above factors, still holds true.  Rather than the value of a site being due to any one cause, it is more likely to be a combination of causes that go towards the demand to occupy a particular site. One thing is certain; that the demand for a site determines its value, and that value is affected by location.  Adam Smith, in a chapter on the location of housing, noted that:

Infrastructure

As the community grows the need for communal facilities increases proportionately.  In the earliest stages these requirements are pretty basic, a village pump, a schoolhouse, a bridge.  Proximity to these increases land values.  In the later more developed community, the requirements become more advanced; sewerage systems, street lighting, water, gas and electricity services, transport systems etc.  All of these may be described as infrastructure, which falls into two types, according to how it is financed; publicly or privately.  Public infrastructure is financed and maintained through taxation.  Private infrastructure is financed through private investment capital and maintained out of profits from charging for the service.  In either case proximity of a site to any of these facilities would normally increase its value.  However there are exceptions to this rule; as mentioned above, where the land values are adversely affected by new infrastructure then any land value based tax would be proportionally reduced.

In the 19th century, in Britain, the railways were a highly lucrative private investment but were eventually rendered uneconomic with the advent of the internal combustion engine and the growth of road transport.  However they had become an integral part of the economic structure of the country and had to be nationalised in 1948, to maintain the service, on which the country had become dependent.  The railways could not be allowed to die away, as had the canal system when superseded by the railways.  The subsequent attempt at re-privatisation has never really worked and the railway system is still heavily subsidised by the taxpayer.  Those who have consistently profited from the railways throughout the whole period are the landlords, close to the stations, whose property values have constantly increased.

Also part of infrastructure are the services provided for instance by the NHS and the school system.  When buying a house, parents will pay extra to be in the catchment area of a good school.  This increases the economic pressure which is reflected immediately in higher house prices, due to the demand to be close to the school; another instance of the significance of location.

Population Intensity (agglomeration).

The simple fact of population presence increases land values.  Where all other factors remain unchanged, any population increase will increase the economic pressure within a community. The introduction of an area of ‘non-productive’ residential housing will add to the overall economic pressure.  Its presence will increase demand for goods and services, and those who provide the goods and services will prosper and compete for the best sites on which to operate.  This will inevitably increase the site values.  Assuming that the residents are also working elsewhere in the community, their work will add to the co-operative surplus and the overall wealth of the community.  Increases of population due to immigrants willing and able to work will always increase the general level of prosperity.  In his book The Future of Capitalism, Paul Collier notes:

‘The gains from agglomeration are generated by interactions between masses of people, and so they are a collective achievement that benefits everyone’. (2)

Agricultural and industrial land are exceptions to this cause.  As shown in the diagrams in part 2, the agglomeration effect is only significant in an urban context.  The ‘agglomeration’ of a hundred farms over a vast area would not produce an agrarian economic centre due to location.  The location value of farmland would vary according to proximity to markets, abattoirs, grain storage facilities etc.  However the basic principle holds good within an urban situation.

The Planning System

The planning system represents a massive, but necessary interference with the natural development of urban land values.   Unrestrained organic growth gave rise to the chaotic squalor of the great industrial cities of the 19th century and, in the 20th century, to the ribbon developments and urban sprawl of the interwar years.  This was seen as a wasteful and inefficient use of land and attempts were made to bring it under control.  The Housing and Town Planning Act of 1909 was the first of a series of measures that culminated in the 1947 Town and Country Planning Act, which introduced the requirement of planning permission for any development, in particular for any proposed change of use.  This gave rise to the phenomenon of ‘planning gain’ where a change of use permission could significantly increase the value of a site; this increase accruing to the benefit of the landholder.  In 1955 the protective ‘green belt’ zones were introduced around major city conurbations, so magnifying the issue of planning gain when a site was re-zoned.

Where land values are concerned the old natural organic growth at least provided a comparatively smooth transition between different use values, whereas the imposition of zoning introduced very abrupt changes of value on either side of an artificial boundary.  On the drawing board planners may re-allocate an area for a different use or extend a boundary and so alter the potential values of the sites affected.  The differences of use value vary considerably.  Between say light industrial and retail uses the difference may not be great but where it involves re-zoning of land previously within the green belt for residential development the difference can be enormous. Where permission is granted for development of previous green belt land for residential purposes the increase in value can be more than 200 times (3).  This ‘betterment’ gain is partially redeemed under the present Community Infrastructure Levy, depending on the tariff rate set by the local authority, which is known in advance by the developer.  This system is arguably better than the previous 106 agreement, where the payment was negotiated, but it is still only a one-off payment and does not take into account the on-going rental values in the future.

Under an LVT system I would suggest a process where, when for instance a change of green belt zoning for development is intended, the local authority could compulsorily purchase the land, close to existing use value, with compensation for disturbance to the farmer/landowner.  The land could then be sold on the open market for residential development to the highest bidder.  The developer would buy the land in the full knowledge of the future LVT obligation.  In this way the farmer would get a fair price plus compensation, the local authority would get the same price for the land, with an assured tax revenue base in the future, and the developer would acquire a valuable site at his own price.   Any need to appease local residents with particular amenities could be financed from the increased tax revenue.

Security

All communities require security.  The vast majority of people throughout the world want a situation where they are able to live and work peacefully in a secure environment.  Except during the period of the ‘troubles’ in Northern Ireland, in the UK we rather take for granted the security we enjoy.  Lack of security and the rule of law affects the economic circumstances of any community.  In any search for properties to buy, many estate agents’ websites now include ‘heat maps’ of high crime areas to alert prospective buyers.  Absence of security discourages inward immigration and investment, impedes productive activity and reduces any desire of outsiders to locate in the community, which of course lowers land values.

An interesting case is in Rio de Janeiro where, since 2008, the authorities have been conducting a policy of ‘pacification’ in the old slum favelas, which had become crime ridden no-go areas.  The police moved in and systematically cleared out the drug pushers and criminal gangs and maintained permanent street patrols.  Once the pacification was seen to be successful, residents and traders moved back in with the result that property (land) values increased rapidly. (4).   Some favelas in fact are in good locations, with stunning views over the ocean, but had lost their economic value due to the lack of security.

Value and Price

Whilst on the subject of value it is worth saying a few words about the relationship between value and price.

As a generalisation it can be said that whatever has a price must also have a value, but whatever has value does not necessarily have a price. The air we breathe has immense value to everyone, but no price. Anything that is abundant and freely available will not have a price except where work is done. The fish we take from the sea have a price mainly because of the work done in the catching and processing; it is generally the work that we pay for (5).  Thieves may steal a highly valuable ,and well known, painting from a museum but find that, because of its known provenance, it is un-saleable to any reputable dealer; it is in fact priceless. Value is determined by desire for acquisition; price is determined through a transaction.

In any transaction in kind, there are four values and two prices. Man A sets a value on the article he has and a higher value of that of man B. The same must apply to man B, for the transaction to take place. The price to man A is the article of B, and the price to man B is the article of A. The introduction of money simplifies this process considerably but by the same logic, rendering two values and one price. There still has to be an inequality of values for the transaction to take place.

A further variation arises where the price is negotiable; the buying and selling of a house is a good example. The seller may put his house on the market for a price that is 20% above its valuation. The buyer makes an offer that is at or near the valuation price. The negotiation goes back and forth until a price is finally agreed at say 10% above the valuation, which becomes the transaction or selling price. Throughout this process, the valuations in the minds of both buyer and seller have been relatively constant; that of the seller below the transaction price, that of the buyer above it.

The demand (or desire) for something creates value which gives rise to trading with others having different objects of desire with different values. The activity of trading establishes price. Where land values are concerned, the demand for a particular site gives rise to its value, the price is determined at the point of sale.

References:

(1)  Adam Smith, The Wealth of Nations, book 5, chapter 2, pp. 432-3

(2)  Paul Collier, The Future of Capitalism, Penguin Random house,2018, p.134.

(3)  Using figures from the Valuation Office Agency:  Property Market Report 2011.

(4)  http://www.ft.com/intl/cms/s/2/5a4c57ea-1612-11e3-a57d-00144feabdc0.html#axzz2raqku0bC

(5)  The price may also be affected by the species of fish; some are more valued than others (see item 3.02 on the exceptional blue fin tuna)