<p>Because of population growth, savings, and technological innovation the stock of capital and augmented labor are growing over time. These forces raise the marginal product of land. Unlike capital, the supply of land is fixed. This means that the supply of land can't increase in response to the rising marginal product. Investors have to be indifferent between investing a dollar in holding land and a dollar of productive capital. Capital is paid its marginal product (<span class="math-container">$r$</span>). For investors to be indifferent, each dollar buys <span class="math-container">$1/P$</span> worth of capital, and that fraction of a unit of land returns <span class="math-container">$r$</span>. One unit of real estate actually returns <span class="math-container">$rP$</span>. So, over time, the forces that raise the marginal product of labor and capital, population growth, capital deepening, and technological innovation, raise the marginal product of land and therefore push up the price because the quantity cannot adjust.   </p>

<p>This assumes we can abstract from issues of taxation and depreciation. We can handle those details but they don't change the basic story. What is more important issue is that land is in fixed supply and capital is not. </p>

<p>There are some innovations that increase the literal or effective quantity of land: e.g. landfill, multi-story construction, enhancements in in agricultural productivity. More accurately, in practice, the quantity of land can adjust can adjust in a limited way, more slowly, and at greater cost than physical capital. This preserves insight above: quantities do not adjust to equate the marginal product of physical capital and land, and so the price must do so instead. </p>

CC BY-SA 4.0
2018-10-10T06:55:08.587Z
+1 with a minor quible: land is not completely fixed, except in the very long run. In the context where land matters a lot for productivity (ag & forestry) we can increase supply by conversion of other uses and use of fertilizers. We can also create some land by setting up polders.
Maarten Punt
CC BY-SA 4.0
2018-10-10T09:22:16.433Z
I added a paragraph to address this concern.
BKay
CC BY-SA 4.0
2018-10-10T14:42:39.087Z
It's a reasonable answer but I have one major concern. Marginal product is the change in output for a marginal change in input. This makes sense for labour and capital goods (e.g. machinery) because these have a production cost. Land has no production cost. The terminology 'marginal product' is highly confusing since it conflates those factors with a production cost (a concrete theory) with those who do not (circular). Absent production cost,the price of land alters to equalise the rate of profit with in this case the rental yield (& with df+expectations: discounted cashflow).
user19704
CC BY-SA 4.0
2018-10-09T14:25:18.533Z
2018-10-10T09:22:01.580Z
2018-10-10T09:22:01.580Z
BKay
<p>At present, I was thinking of the following factors:</p>

<ol>
<li>Aggregate rents go up as disposable income goes up</li>
<li>The ratio of house prices to rents is driven by interest rates, including long-term interest rates.</li>
</ol>

<p>And as comments (things that are hard to build in):</p>

<ol start="3">
<li>Infrastructure development locally increases rents</li>
<li>Heterogeneity of land (e.g. a north south divide, large cities) increases average house prices.</li>
</ol>

<p>I would think that private land ownership then has various effects e.g.:</p>

<ol>
<li>Increases inequality of wealth</li>
<li>Reduces aggregate demand because landowners, being richer in general, have reduced propensity to consume</li>
<li>Possibly reduces investment through crowding out.</li>
</ol>

CC BY-SA 4.0
2018-10-09T11:38:10.460Z
2018-10-09T11:38:10.460Z
user19704
<p>I'm interested in what factors lead to changes in the price of land. I'm interested in this question in general across a whole country, say (as opposed to land in particular places). </p>

<p>So I'm interested in this question, because I'm interested to build a stock flow consistent model of 'Georgist' effects: integrate georgist understanding into a  post keynesian model framwework.</p>

<p>As a follow up issue, I'm also interested to what extent the macro drivers of land value are shared with shares in companies that have extensive market power (e.g. coca cola). Can land be thought of as an archetype of other 'monopoly' assets.</p>

<value><land>
What are the drivers of the price of land?
user19704
# What are the drivers of the price of land?

(Asked by: username_0 on 2018-10-09)

I'm interested in what factors lead to changes in the price of land. I'm interested in this question in general across a whole country, say (as opposed to land in particular places).

So I'm interested in this question, because I'm interested to build a stock flow consistent model of 'Georgist' effects: integrate georgist understanding into a post keynesian model framwework.

As a follow up issue, I'm also interested to what extent the macro drivers of land value are shared with shares in companies that have extensive market power (e.g. coca cola). Can land be thought of as an archetype of other 'monopoly' assets.

**Tags:** value, land

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## 2 answers

### Answer by username_1 on 2018-10-09. Score: 2

Because of population growth, savings, and technological innovation the stock of capital and augmented labor are growing over time. These forces raise the marginal product of land. Unlike capital, the supply of land is fixed. This means that the supply of land can't increase in response to the rising marginal product. Investors have to be indifferent between investing a dollar in holding land and a dollar of productive capital. Capital is paid its marginal product ($r$). For investors to be indifferent, each dollar buys $1/P$ worth of capital, and that fraction of a unit of land returns $r$. One unit of real estate actually returns $rP$. So, over time, the forces that raise the marginal product of labor and capital, population growth, capital deepening, and technological innovation, raise the marginal product of land and therefore push up the price because the quantity cannot adjust.

This assumes we can abstract from issues of taxation and depreciation. We can handle those details but they don't change the basic story. What is more important issue is that land is in fixed supply and capital is not.

There are some innovations that increase the literal or effective quantity of land: e.g. landfill, multi-story construction, enhancements in in agricultural productivity. More accurately, in practice, the quantity of land can adjust can adjust in a limited way, more slowly, and at greater cost than physical capital. This preserves insight above: quantities do not adjust to equate the marginal product of physical capital and land, and so the price must do so instead.

> **Comments:**
> **username_2**: +1 with a minor quible: land is not completely fixed, except in the very long run. In the context where land matters a lot for productivity (ag & forestry) we can increase supply by conversion of other uses and use of fertilizers. We can also create some land by setting up polders.  
> **username_1**: I added a paragraph to address this concern.  
> **username_0**: It's a reasonable answer but I have one major concern. Marginal product is the change in output for a marginal change in input. This makes sense for labour and capital goods (e.g. machinery) because these have a production cost. Land has no production cost. The terminology 'marginal product' is highly confusing since it conflates those factors with a production cost (a concrete theory) with those who do not (circular). Absent production cost,the price of land alters to equalise the rate of profit with in this case the rental yield (& with df+expectations: discounted cashflow).  

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### Answer by username_0 on 2018-10-09. Score: 0

At present, I was thinking of the following factors:

1. Aggregate rents go up as disposable income goes up
2. The ratio of house prices to rents is driven by interest rates, including long-term interest rates.

And as comments (things that are hard to build in):

3. Infrastructure development locally increases rents
4. Heterogeneity of land (e.g. a north south divide, large cities) increases average house prices.

I would think that private land ownership then has various effects e.g.:

1. Increases inequality of wealth
2. Reduces aggregate demand because landowners, being richer in general, have reduced propensity to consume
3. Possibly reduces investment through crowding out.


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