Land value is a residual
What is urban land worth?
There is an answer:
- A structural and formulaic algorithm.
- Easily deducible.
- Globally applicable — works from
- Yet often ignored, especially by policymakers.
“Why, a four-year-old child could understand this report! Run out and find me a four-year-old child — I can’t make head nor tail of it.” — Duck Soup.
Functionally, what characterizes land that is urban rather than rural or agricultural? It is developed or developable — on it you grow people. So its value undeveloped derives from its value when developed.
If it can’t be developed, it’s not urban land …
Property value when developed is set by the market — buyers and sellers acting independently, trading at arm’s length, each fully informed and under no undue compulsion to act.
Cost to develop represent the full hard and soft cost uses of funds (link in .pdf):
- Hard costs. Money spent that leaves a tangible residue: foundations, walls, electrical, plumbing, interior walls, appliances, cabinetry, and more.
- Soft costs. Money spent that, though integral to getting the hard costs spent, leaves no tangible residue: fees (architects, engineers, lawyers, accountants, even housing financial consultants!), permits, title/ recordation costs, interest, loan fees, marketing costs (e.g. advertising, brokerage commissions), and more.
Which brings us to the urban land value equation:
Urban land-value: the equation
+ Property value after development
- Aggregate cost to develop (including soft costs, contingency, and profit)
= Land value ‘as is’ before development
This simple equation — land value is worth the residual of development value over development cost — leads to numerous very profound (if gloomy) consequences for urban policy and, most especially, the affordable housing. From time to time I’ll return to them.
Mrs. Teasdale: I’ve sponsored your appointment because I feel you’re the most able statesman in all of Freedonia.
Firefly: Well, that covers a lot of ground. Say, you cover a lot of ground yourself. You’d better beat it.
I hear they’re going to tear you down and put up an office building where you’re standing.
Okay, here’s an easy one: urban land has no ‘intrinsic’ value — its price rises and falls entirely according to external factors (developed values, development costs).
I leave the remaining conclusions, for now, as an exercise for the reader.
