Gone are the days of free money: falling land prices?

Interest rates are rising, the days of free money are over. The housing market has reached a tipping point. So the obvious question is whether the land market follows the housing market. The land market (and its derivative, the market for rent) has been studied extensively in the history of economics. In the Netherlands, Jan Luijt, economist at LEI (now Wageningen Economic Research) in particular, has devoted various publications to this in recent decades. A series that started in 1983 with 'A national model of the agricultural land market(s)'.

Ever since the 19th century, economists have agreed that the price of land is determined by what you can earn with it in the coming years. The English economist David Ricardo was the first to explain that the price of land is high when the price of grain is high, and not vice versa: that grain would be expensive because the land is expensive. These revenues do not only concern the revenues of the following year, but also those of the following years. See here the influence of interest rates: if they go up, future years count less. The present value of the income stream decreases with rising interest rates, because saving becomes more attractive and not everyone is able to borrow at a higher interest rate. And so house prices and land prices fall.

The expectations about the revenues for the coming years are also not very good. Grain, sugar and milk prices are high right now, but they don't have to stay that way. And the agricultural environmental policy also leads to lower yields through obligations for buffer strips and less manure use (loss of derogation).

The land market does not exist
Luijt put the last two letters of his title in brackets: the land market does not exist, there are numerous sub-markets, within and outside agriculture and in many different regions. For example, land near cities is worth more because of a (speculative) investment aspect: if the government upgrades the land from agricultural land to industrial estate or housing land, there are additional revenues. Project developers who can get started using the self-realization principle are willing to pay a lot extra (and thus make houses more expensive than necessary). However, a study ('Causes of differences in land prices') by a team in 2007 showed that this is already taken into account in transactions between farmers in those areas. Land prices are higher in those areas than in purely agricultural areas. Higher interest rates also make it more expensive for project developers and investors to hold a large land portfolio, on the other hand, the construction plans in this country are large.

Whether buying out farmers in the urban regions will lead to upward price pressure in the more rural regions is highly questionable. Because there is sometimes a bought-out farmer who buys in an area, this is often assumed at the drinks table. But research failed to demonstrate this effect. More important for the differences between regions is the company size (and therefore the need for economies of scale) and the size of companies, because a number of larger companies can more easily finance an expensive purchase. This also affects the bargaining power of buyers and sellers.

Wet nature has a negative impact on land price
The 2007 study looked at prices of individual plots: in more rural areas, the land use of surrounding plots also appeared to play an important role, even more than the physical yield value. For example, highways, houses and wet nature had a negative influence on the land price of an agricultural plot. A kind of negative shadow effect. Purchases for nature in an area did have a driving effect on the price of land.

And this brings us to the great uncertainty in the current land market: how much of the €24 billion from the National Program for Rural Areas will the government put into the land market? A business model for extensification calls for lower land prices, land purchases drive them up. And so the development of the land price continues to look a bit like coffee grounds and a popular topic for the regular table.

Krijn J. Poppe

Krijn Poppe worked for almost 40 years as an economist at LEI and Wageningen UR and now holds a number of advisory and management positions. For Boerenbusiness he dives into his bookcase and discusses current developments on the basis of studies that have become classic.

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