Efficient Land Use with Congestion: Determining Land Values from Residential Rents

In this paper, we propose a model of the residential rental market that meets the functional requirements of the underlying land market. A crucial aspect in the model is the incorporation of land quality represented by the floor area ratio (FAR),one of the most important land use regulation measures. Embedded in a hedonic setting, the model is tested empirically using apartment rent data from the canton of Zurich in Switzerland. From our empirical results we derive two main reasons for a monocentric structure of land prices. First, the central location's attractiveness makes land prices more expensive. Second, on a regulatory basis, the FAR works as a multiplier for land prices. Because the FAR is high in central areas, land prices are inflated accordingly. As a by-product of the model test, we find a capitalization rate for land of 8.1%.