Ebook Price Discovery Between Residential Land & Housing Markets
House prices have escalated dramatically over the past decades, across different metropolitan areas, such as in South Korea (Hannah et al., 1993; Cho and Ma, 2006), Hong Kong (Tse, 1998; Cheung, Tsang and Mak, 1995), Sydney (Abelson, 1997), Taiwan (Lin, 1993; Chen and Patel, 1998), United Kingdom (Eve, 1992) and the US (Potepan, 1996).
The boom in house prices is a big concern to policy makers due to its impact on the local and business communities. Aspiring home owners worry that the price escalation may price them out of the market, whilst businessmen worry that it would increase business cost and reduce their ability to compete. It is therefore not surprising that policies have been implemented in an attempt to control the price escalation and make housing more affordable.
On the demand side, a convenient group of culprit constantly blamed for the volatile and escalating prices in the housing market is the speculators. Hence, anti-speculation measures are commonly implemented to curb excessive speculation in the local housing market. On the supply side, a common accusation is that restrictive planning policies limit land supply and thereby, push up house prices. It is often contended that an expansion in the land supply would enlarge the housing stock, which in turn would reduce the pressure on house prices to increase. In most developed cities, urban land supply is often limited and characterized by fragmented land ownership. To a limited extent, planners can still increase land supply in these areas by permitting higher density residential developments on existing land and by allowing change of zoning and land use in the city fringe. However, even in areas where land supply is dominated by the state, for example in Hong Kong and Singapore, the release of land for development purpose is still a contentious issue.
Since the quantity, timing and pricing of land supply are regulated by the state, it is not surprising that government policies have been blamed for the booms and busts experienced in the housing markets. In particular, high land prices (due to planning restrictions and revenue maximization objective of the state when allocating scarce land resources) are often cited as the main cause for escalating housing prices in these metropolitans. This flows from a neo-classical land rent theory (see Needham, 1981) that the prices of housing are high because land prices are high.
The logic is that the price of a product is determined by its production costs, of which land cost forms part of it. Evans (2004) contends that when land has alternative uses, it must receive its due remuneration like any factor of production. Hence, an increase in the price of land would cause a corresponding hike in the price of the product (housing). Others, however, countered that land prices are determined by demand, not supply on the basis that the residual valuation is employed by most developers to formulate their land bids. Grigson (1986), for example, argues that “house prices determine land prices not the reverse, because the builder’s estimate of the selling price of the building will largely determine his bid for the piece of land. This view, which he claimed is shared by a number of economists and practitioners, is consistent with the Ricardo (1913) land-price theory that high land prices are a result (not cause) of high property prices.
There are therefore two different views on the relationship between land and housing prices. Do high land prices contribute to high property prices? Or is it the other way around, high property prices result in high land prices? So far, no studies have examined this issue empirically, primarily because of the lack of data since urban land are traded infrequently. This paper contributes to the literature by examining empirically the dynamic relations between the housing and land prices. Singapore offered a unique setting to study this issue because of its active land sales market. Between 1990 and 2000t, close to 500 development sites were sold for large private residential projects, or approximately 31 sites sold a year. We take advantage of the database to construct a constant quality land price index to capture quarterly price movements in the urban land market over the 16-year period. Once the land price index is constructed, cointegration and Granger causality tests are employed to examine its long-term and short-term relationship with the readily available housing price index.
Results of the Johansen cointegration test indicate that land prices and housing prices are integrated, meaning that a long-term relationship exists between two time series. Modeling the Granger causality test within an error-correction framework, we observe a causality effect flowing from the housing market to the land market. Indicating that the prices in the housing market react quicker to new information or exogenous shocks, the results suggest that price movements in housing market serve as a reliable lead indicator of future price movements in the land market.
The remaining of this paper is organized as follows: Section 2 reviews related studies on this topic. Section 3 presents the data and research methodology to examine the long-term relationship between land and house prices. Section 4 discusses the results of our empirical investigation. Section 5 concludes and offers the policy implications as well as identifies areas for further research.
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