How is the value of land determined, and how are these values affected by land-use policies? |
||
|
When an investor holds a share of a company's stock,
he or she owes part of the company and is, thereby, entitled to a portion of the company's future
profits. Similarly, ownership of land represents an entitlement to the future stream of profits
that can be generated from the land. This stream of profits is reflected in the market price of
the land. To see how this works, consider the market value of farmland in Clackamas and Gilliam
Counties. In 1997, the average value in Clackamas County was the highest in the state ($7,447 per acre)
while Gilliam county had the lowest average value ($265 per acre). What explains the huge difference?
To some extent, it may reflect higher returns to agriculture in Clackamas County, but more important
are the much higher returns to development (e.g., for residential housing) in Clackamas County. Even
though the land is currently in agriculture, the price it would sell for today reflects the returns
from a more profitable future use. Land-use policies have the potential to affect the stream of future profits from land and, thereby, influence its current value. For example, if zoning policies prohibit development of a parcel located in an area with high returns to development, the value of the parcel will likely be less than if development is unrestricted. On the other hand, development restrictions may raise the value of nearby parcels that can be developed. Of course, much of the future is uncertain. Development may be prohibited now, but regulations may change to allow development in the future. In this case, the price of land will reflect expected future profits-profits without development and profits with development, each weighted by the likelihood of the outcome. To the extent that buyers and sellers in the land market anticipate the future correctly, current land prices will tend to automatically reflect the anticipated effects of land-use policies on future profits. This means that at the time of purchase, buyers will pay less for land if policies are expected to have negative impacts on future profits, and they will pay more for land if policies are expected to have positive impacts. ~
|
||