Over-valued or over-looked? A theoretical and empirical investigation of agricultural land values against profitability in Aotearoa New Zealand

We investigate whether New Zealand’s rural land is over-valued when compared to its agricultural profitability. First, we develop a theoretical time-series framework showing that a positive profit shock in one agricultural land use should raise the value of land in that use, inducing land-use change. On average, the present value of expected future profits from national rural land should have a one-to-one relationship with the value of agricultural land when both are weighted by respective land use share. Second, we develop an empirical application using a new nationally consistent dataset of rural property sales and average agricultural profits for the period 1980-2012. Using a novel two-stage least squares approach to account for endogeneity, we find a positive relationship between the present value of expected agricultural profitability and rural land values. Furthermore, we cannot reject the hypothesis that this relationship is one-for-one, indicating that New Zealand's rural land does not appear to be over-valued. Our time-series methodology provides a roadmap for studies in other jurisdictions.