Development of land prices a popular item at the drinks table

Interest rates are rising, the time of free money is 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 lease market) has been the subject of much study throughout 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, not the other way around: that grain is expensive because the land is expensive. Those revenues are not only about next year's revenues, but also those of subsequent years. See here the influence of the interest rate: if it goes up, the future years count less heavily. The cash value of the income stream decreases when interest rates rise, because saving becomes more attractive and not everyone is able to borrow at higher interest rates. As a result, house prices and land prices are falling.

The land market does not exist
Expectations about the revenues for the coming years are also not very optimistic. Grain, sugar and milk prices are now high, but they don't have to stay that way. And the agricultural environmental policy also leads to lower yields through, among other things, obligations for buffer strips and less manure application (loss of derogation). Luijt put the last two letters of his title in parentheses: the land market does not exist, there are numerous sub-markets, inside 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 or housing land, there will be extra income. Project developers who can get started via the self-realization principle are prepared to pay a lot more (and this means that houses are made more expensive than necessary). But as a study ('Causes of differences in land prices') by a team in 2007 showed, this is already taken into account in transactions between farmers in those areas. Land prices in those areas are higher than in purely agricultural areas. Naturally, higher interest rates also make it more expensive for project developers and investors to maintain a large land portfolio, but on the other hand, the construction plans in this country are big.

Bought-out farmer subject to drinks table
Whether buying out farmers in the urban regions will lead to upward pressure on prices in the more rural regions is very much the question. Because there is sometimes a bought-out farmer who buys into an area, this is often assumed at the drinks table. However, research could not demonstrate this effect. More important for the differences between regions is the size of the company (and thus the need for scaling up) and the size of the companies, because a number of larger companies can more easily finance an expensive purchase. This also affects the bargaining power of the buyers and sellers.

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.

Extensification requires lower land prices
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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