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Is Farm Real Estate The Next Bubble?

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  • Brett Olsen
  • Jeffrey Stokes

Abstract

The recent increase in farmland prices leads many to conjecture that a price bubble exists. A dataset of Iowa farmland prices for three grades of quality over the last 60 years is examined to address the question whether the conditions for a rational expectations bubble are evident. An abnormal component in the change in farmland prices is found during the most recent sub-period of the sample. A novel valuation model that measures the speculative component of farmland value as a function of cash rents shows no speculative component is present. An additional test of the time series characteristics of the data provides no evidence of negative duration dependence. However, analysis of transition probabilities shows asymmetry exists most notably in the low quality farmland data series. Finally, time irreversibility is shown to be present at different lags for only the lowest farmland quality grade. Overall, the results imply that the low quality grade farmland is the most likely candidate to exhibit the conditions necessary to support a rational expectations bubble. In general, however, the data offer weak support of a bubble in farmland prices. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Brett Olsen & Jeffrey Stokes, 2015. "Is Farm Real Estate The Next Bubble?," The Journal of Real Estate Finance and Economics, Springer, vol. 50(3), pages 355-376, April.
    • Handle: RePEc:kap:jrefec:v:50:y:2015:i:3:p:355-376
    DOI: 10.1007/s11146-014-9469-9
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    1. Fatima, Hira & Ahmed, Mumtaz, 2019. "Testing for Exuberance Behavior in Agricultural Commodities of Pakistan," MPRA Paper 95304, University Library of Munich, Germany.
    2. Luise Meissner & Lisa Kappenberg & Oliver Musshoff, 2022. "An Analytical Framework for Evaluating Farmland Market Regulation: Examining the German Land Transaction Law," Land, MDPI, vol. 11(10), pages 1-12, October.
    3. Plogmann, Jana & Mußhoff, Oliver & Odening, Martin & Ritter, Matthias, 2022. "Farmland sales under returns and price uncertainty," Economic Modelling, Elsevier, vol. 117(C).
    4. repec:ags:aaea22:335505 is not listed on IDEAS
    5. Stefan Seifert & Christoph Kahle & Silke Hüttel, 2021. "Price Dispersion in Farmland Markets: What Is the Role of Asymmetric Information?," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(4), pages 1545-1568, August.
    6. Plogmann, Jana & Mußhoff, Oliver & Odening, Martin & Ritter, Matthias, 2020. "What Moves the German Land Market? A Decomposition of the Land Rent-Price Ratio," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 69(1).
    7. Grau, Aaron & Jasic, Svetlana & Ritter, Matthias & Odening, Martin, 2019. "The impact of production intensity on agricultural land prices," FORLand Working Papers 09 (2019), Humboldt University Berlin, DFG Research Unit 2569 FORLand "Agricultural Land Markets – Efficiency and Regulation".
    8. repec:ags:aaea22:335626 is not listed on IDEAS
    9. Pinto, Allan & Griffin, Terry W., 2022. "Detecting bubbles via single time-series variable: applying spatial specification tests to farmland values," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322534, Agricultural and Applied Economics Association.

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