Land leverage dynamics in property markets

"This paper examines the Land Leverage Hypothesis through a detailed study of data from the city of Perth, Western Australia. Through the land leverage framework, this paper examines property assets as a form of composite asset where major components of value are commonly classified as comprising a land and an improvements (structural) component as relevant proportions of the total value of the asset. The term, Land Leverage, reflects the proportion of total property value embodied in the value of land as distinct from improvements. The research is performed in two ways; a market approach where it follows transactions of vacant land through subsequent improved transactions, and an assessed value approach where it utilises a significantly larger sample with local assessment records for land value as at the date of transaction. The results confirm significant land leverage influences within the aggregate Perth housing market over the sample period 1988-2011 and significant variation in the pattern of land leverage dynamics when the housing market is disaggregated, both in terms of the age of the housing stock and spatial region. Another feature of the results confirms significant temporal influences for land leverage. These results have important implications for housing market analysis. The results indicate the importance of considering land leverage as a ""fundamental"" influence in housing markets, most relevant within the context of measurement of house prices and identification of rationality in housing markets within the context of either existing or potential housing price ""bubbles"". These results also suggest that there are important implications for the interaction between housing and financial markets. Land price dynamics play an important role in connecting housing wealth to financial markets. As the land component of home value has increased over time, housing as an asset class appears to have become a more volatile financial asset due to the influences of increasing land leverage with resultant implications for capital markets and personal wealth portfolios."