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Best Land Use with Negative Externalities: Determining Land Values from Residential Rents

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  • Fuess, Roland

    ()

  • Koller, Jan A.

    ()

Abstract

When land regulations are binding, then the land price per m2 is determined by the attractiveness of the location and the restrictiveness of the regulation. In the case of a maximum oor area ratio (FARmax) restriction, the best use land price can be directly expressed as a function of the FARmax and local amenities. We show theoretically and empirically how this approach can be used to determine land values from residential rents. From our empirical results, we derive two main sources for a monocentric structure of land prices. First, the location attractiveness of centrally located dwellings makes land prices more expensive. Second, on a regulatory basis, the FARmax works as a multiplier for land prices. Because the FARmax is high in central areas, land prices are inated accordingly. Our model gives insight into determinants of urban land prices. In addition, it is a useful approach for land appraisal in urban regions.

Suggested Citation

  • Fuess, Roland & Koller, Jan A., 2017. "Best Land Use with Negative Externalities: Determining Land Values from Residential Rents," Working Papers on Finance 1705, University of St. Gallen, School of Finance.
  • Handle: RePEc:usg:sfwpfi:2017:05
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1705.pdf
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    References listed on IDEAS

    as
    1. Esteban Rossi-Hansberg & Pierre-Daniel Sarte & Raymond Owens, 2010. "Housing Externalities," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 485-535, June.
    2. Jens Kolbe & Rainer Schulz & Martin Wersing & Axel Werwatz, 2012. "Location, Location, Location: Extracting Location Value from House Prices," Discussion Papers of DIW Berlin 1216, DIW Berlin, German Institute for Economic Research.
    3. Joshi, Kirti Kusum & Kono, Tatsuhito, 2009. "Optimization of floor area ratio regulation in a growing city," Regional Science and Urban Economics, Elsevier, vol. 39(4), pages 502-511, July.
    4. Doina Chichernea & Norm Miller & Jeff Fisher & Bob White & Michael Sklarz, 2008. "ACross-Sectional Analysis of CapRates by MSA," Journal of Real Estate Research, American Real Estate Society, vol. 30(3), pages 249-292.
    5. Barr, Jason & Cohen, Jeffrey P., 2014. "The floor area ratio gradient: New York City, 1890–2009," Regional Science and Urban Economics, Elsevier, vol. 48(C), pages 110-119.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Apartment rent; land use regulation; floor area ratio (FAR); land prices; monocentric structure;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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