Determination of Land Rents: A simple approach

Henri L.F. de Groot
Department of Spatial Economics
VU University Amsterdam

This note develops a simple methodology to derive land rents from housing prices by exploiting information on variation of lot sizes. The methodology is used for the Netherlands using unique information on more than one million transactions over the period 1985-2007. The spatial variation in derived land rents is illustrated as well as the association with, among others, population density and distance to the city centre.

Key words: land rents, hedonic pricing
JEL codes: Q15, R31, R51

1. Introduction
'Corn is not high where rents are high, but rents are high where corn is high.'This simple but fundamental insight from David Ricardo is still at the heart of most urban economic models. The simple monocentric city models explain variation in land rents from the difference in the returns to labor between the city centre and the periphery and from the distance to the city centre. The larger the return and the smaller the distance to the location where this return can be reaped, the larger the land rent that consumers are willing to pay. This insight can easily be generalized to situations where, for example, the city centre provides unique amenities or relatively high wages due to agglomeration externalities (cf. Roback, 1982).

Information on variation in land rents can hence be an important tool to value amenities, accessibility, public goods, etc. A huge empirical literature using hedonic pricing techniques uses this insight for the purpose of valuation of individual aspects of the location, such as accessibility of jobs, facilities and open space, noise levels, etc. Despite the importance of land rents for policy purposes, surprisingly little systematic information on variation in land rents is available. In so far as local governments have information on actual transactions, this information is oftentimes not publicly available. This note develops and applies a simple methodology that can be helpful in deriving variation in land rents across space at refined levels of spatial aggregation allowing for analyses of within- and between variation of land rents in cities. The obtained information on land prices can subsequently be used for valuation exercises, assessing impacts of regulation, etc. We refer to Glaeser et al. (2005), Davis and Heathcote (2007) and Davis and Palumbo (2008) for roughly comparable exercises to derive hedonic land prices in US metropolitan areas.

Animation of land values Noord-Holland 1990-2007 (Click to enlarge)


Our methodology critically hinges on the availability of information on lot sizes. By adding lot sizes to an otherwise standard hedonic pricing model that explains variation in housing prices from variation in their characteristics, we can derive the willingness to pay at the margin for an additional square meter of land. This information is available in the Netherlands for a long period (viz. 1985-2007). This provides us with a unique source of information, both in terms of time span as well as coverage since the brokers united in the NVM cover about 70-80% of all housing transactions in the Netherlands.

We use this unique source of information to apply the methodology for deriving land rents. The results are shown to generate a very sensible picture of land rents and their variation across space. We can also use the information to derive relationships between, for example, land rents on the one hand and population densities or distances from the city centre on the other hand. The information also enables us to show temporal dynamics.

This note proceeds as follows. Section 2 develops the methodology and describes the data. Section 3 presents and discusses the results, and Section 4 concludes and presents directions for further research.

For a further detailed explanation of the applied methodology and discussion of results of the first empirical tests on 4-digit zipcode level, see the methodological paper which is available for download under Publications.


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