Acknowledgements

2. Acknowledgements • The authors gratefully acknowledge: • The Royal Institution of Chartered Surveyors (RICS) education trust for providing funding towards this research. • rics.org/research • Landgate and the Valuer General of Western Australia for providing data used in this research

4. The Land Leverage Hypothesis Property assets (housing) represent composite goods: Housing = composite good = V Land = component = L Buildings = component = B V = L + B

8. The Land Leverage Hypothesis Property assets (housing) represent composite goods: Housing = composite good = V Land = component = L Buildings = component = B V = L + B

9. The Land Leverage Hypothesis Land leverage reflects: the proportion of the total property value embodied in: the value of the land as distinct from improvements (buildings) as a significant factor for establishing the future path of property prices

10. The Land Leverage Hypothesis It follows that the value of land and value of improvements on that land are likely to evolve differently over time? As economists we should not find this surprising ???

11. The Land Leverage Hypothesis Intuition and economic theory suggest significant demand/supply asymmetry between land and improvement components

12. Demand/Supply Asymmetry Demand side Improvements = capital input in housing production Land capitalises the market value of location and infrastructure (schools /shopping/employment centres

13. Perth Australia, house and vacant land prices1988-2008

15. Land Leverage ??? Background ???

16. Background 1- the old • One Hundred Years of Land Values in Chicago: The Relationship of the Growth of Chicago to the Rise of Its Land Values, 1830-1933 • Hoyt, H., 1933. The University of Chicago Press, Chicago.

17. Background 1- the new • The price and quantity of residential land in the United States • Davis, M., Heathcote, J., 2007. Journal of Monetary Economics 54, pp. 2595–2620.

18. Background 1- the new • The price of residential land in large U.S. Cities • Davis, M., Palumbo, M., 2008. Journal of Urban Economics 63, 352–384.

19. Background 1- the new • Land leverage: decomposing home price dynamics • Bostic, R. , Longhofer, S., Redfearn, C., 2007. Real Estate Economics 35, 183–208.

20. Background 1- the new Bourassa, S.C., Haurin, DR, Haurin, J.L., Hoesli, M., Sun, J.,2009. House Price Changes and Idiosyncratic Risk: The Impact of Property Characteristics. Real Estate Economics 37: 2: pp.259-278. Bourassa, S.C., Hoesli, M, Scognamiglio, D., Zhang, S., 2010. Land Leverage and House Prices. Swiss Finance Institute Research Paper Series N 10-48, Electronic copy available at: http://ssrn.com/abstract=1715532

21. Why is this important ??? Housing affordability

22. A stylized example • Consider two homes, one located in Sydney and the other in Adelaide, both homes are valued at $450,000 • The Sydney home is a cheaper home in an established area with older depreciated improvements worth $90,000 and land worth $360,000 • The Adelaide home is a higher-end home of new construction with an allocation of $360,000 to improvements and $90,000 to land value

23. A stylized example • Assume in one year economic fundamentals cause land prices in both markets to increase by 10% (no depreciation and construction costs remain stable) • The 10% increase in land prices translates into a $36,000 increase in the Sydney home, and overall appreciation for the home would be 8% • In contrast, the same 10% increase in land values will only result in a 2% increase in the value of the Adelaide home • Despite the same magnitude of change in land prices, house prices in Sydney would appreciate four times faster than those in Adelaide

24. A stylized example • In summary, the property in Sydney is highly land leveraged, a similar influence to financial leverage • Higher exposure to factors influencing land prices within markets has a more significant influence with increasing land leverage • Land value becomes the major source of price appreciation and volatility • Note if land values dropped by 10% the Sydney home would decline - 8% even though land values changed by the same proportion in both markets

25. Actual and Fundamental House Prices Sydney Adelaide Costello, G., Fraser, P., Groenewold, N. (2011) “House prices, non-fundamental components and interstate spillovers: The Australian experience” Journal of Banking & Finance, Vol 35 (3) pp 653-669.

26. Implications of Land Leverage (for big cities)? Prices for housing are largely driven by changes in price of the land component Older housing has higher land leverage than for new housing Older housing will have higher growth rates than for newer housing

27. Implications of Land Leverage (for big cities)? Trend growth rates for the building and land components are different Land prices increasing = an increasingly important component of aggregate regional/national wealth

28. Data and Methodology In order to calculate land leverage for an individual property, the value of the land must be identified separately from the value of the improvements

29. Some results for Perth 1988-2011 • Average land leverage 63% (63% land, 37% building) • Average overall total property price change+12.3% p.a. • Land component +13.9% • Improvements + 8.7%

30. Some results for Perth • Land values have grown at different rates throughout the Perth Metropolitan region (highly significant results) • There is significant time variation in the influence of land leverage • Most significant influence for land leverage = vacant lot purchases 1998-2006

31. What next ?? • How does this work in submarkets with large variations in the age of the housing stock? • What happens when vacant land is also being sold in submarkets? • Is there a special value for heritage property? • Do neighbourhoods exhibit specific depreciation characteristics for housing stock?

32. Policy considerations • Housing affordability • Measurement of house prices • Housing subsidy policy (rental markets) • Zoning policy - intensity of land-use