A land markt cycl in th Nthrlands Woltjr G.B., Luijt J.L. and Jongnl, R. Papr prpard for prsntation at th 12 th EAAE Congrss Popl, Food and Environmnts: Global Trnds and Europan Stratgis, Gnt (Blgium), 26-29 August 28 Copyright 28 by [Woltjr G.B., Luijt J.L. and Jongnl, R.]. All rights rsrvd. Radrs may mak vrbatim copis of this documnt for noncommrcial purposs by any mans, providd that this copyright notic appars on all such copis.
1 A land markt cycl in th Nthrlands Woltjr G.B. 1, Luijt, J.L. 1 and Jongnl, R. 1 1 WUR-LEI, Dpartmnt of Social Issus, Dn Haag, Th Nthrlands Abstract This papr dvlops a disquilibrium modl of land prics in th Nthrlands. It shows that th bhaviour of tradd quantitis and prics of Dutch land hav som rsmblanc with a disquilibrium land markt modl dvlopd by Søgaard. An rror corrction modl basd on Søgaard s modl gnrats significant rsults with GDP and th ral intrst rat as xplanatory variabls, but rgrttably farm incom nor govrnmnt dmand for land gnrat significant rsults. If th modl is corrct, bubbls ar charactristic for th Dutch land markt, and this suggsts that thr is an opportunity for Dutch govrnmnt to improv on th timing of buying land for natur policy. Kywords land markt cycl, land prics, natur policy. I. INTRODUCTION Rcntly, Dutch govrnmnt has changd its natur policy twic. First, in 1998 it dcidd to buy a lot of land for natur. Four yars latr, in 22, policy changd. Govrnmnt dcidd to buy lss land and to rach th natur goals through privat natur managmnt. This 22 chang in policy was partly inspird by th ncssity to rduc govrnmnt xpnditurs bcaus of a high govrnmnt budgt dficit as a consqunc of th rcssion (figur 1). It happnd that as a consqunc of ths changs in policy most land for natur was bought at th momnt that land prics wr vry high (figur 2). 35 5 3 4.5 4 25 3.5 2 3 2.5 15 2 1 1.5 5 1.5 199 1992 1994 1996 1998 2 22 24 26 Govrnmnt xpnditur on acquisition and natur dvlopmnt (25 prics) GDP % growth Figur 1. Govrnmnt xpnditurs on natur and GDP growth Th dvlopmnt of Dutch natur policy riss two qustions. Th first is to what xtnt mony could hav bn savd by crating a fund that only buys land whn land prics ar low. This rquirs that th managmnt of such a fund knows whn land prics ar too high. Th scond is to what xtnt th fluctuations in dmand for land by govrnmnt has rinforcd th fluctuations in land prics. In ordr to b abl addrss both policy qustions this papr invstigats th dynamics of th agricultural land markt. W start with a disquilibrium land markt modl dvlopd by Søgaard (1993) and show that this modl for th Danish land markt may also b applicabl to th Dutch land markt in th 197s and 199s (sction 2). W intgrat this analysis into an rror corrction modl, and show that this modl dscribs th dvlopmnt of Dutch agricultural land markt prics btwn 1975 and 25 rlativly wll (sction 3). Effcts of disquilibrium on monopoly powr may rinforc th dynamics of xpctations formation in this contxt (sction 4). Thn w try to xtnd th modl with agricultural profitability and govrnmnt xpnditurs on land. Both sm not to gnrat significant rsults, but this may b causd by incorrct spcifications and problms with th data (sction 5). Suggstions for improvmnt conclud this draft vrsion of th papr, but will b implmntd in th final papr (sction 6).
2 3 25 2 15 1 5 199 1992 1994 1996 1998 2 22 24 Govrnmnt xpnditur on acquisition and natur dvlopmnt (25 prics) Ral land pric Figur 2. Govrnmnt xpnditur on natur and ral land pric II. 2. THE LAND MARKET CYCLE Th starting point from our analyss is a modl dvlopd by Søgaard (1993). In contrast to mor modrn studis (Awokus and Duk, 26; Tgn and Kuchlr, 1991; Falk and L, 1998; Moss and Karchova, 25), Søgaard analyss disquilibrium bhaviour in th land markt xplicitly. Corrlatd with th fluctuations in land prics ar normous fluctuations in th numbr of transactions, and this should b part of th undrstanding of land markt dynamics. Th logic bhind both th dynamics in th land prics and th numbr of transactions is an adaptiv xpctation formation procss. If th logic of this procss is undrstood, it may b usd to improv th timing of xpnditurs on natur. Th Søgaard modl can b summarizd as follows 1. Th quantity of land dmandd Q d is dtrmind by th diffrnc btwn th currnt pric P and th quilibrium pric P, th quilibrium pric, and th xpctd pric incras that is assumd to dpnd on th rcnt pric incras P: d (1) Q P P + P + P α α ( α α = 1 ) 2 3 Th sam variabls, but with th opposit signs for th cofficints, hold for th quantity of land supplid Q s : s (2) Q + P P P P β β ( β β = 1 ) 2 3 By dfinition, whn th markt is in quilibrium, i.. P = P -1 = P, th quantity dmandd and th quantity supplid ar qual. Th dynamics starts whn for som rason, for xampl an xpctd incras in agricultural prics, th quilibrium pric changs. If th quilibrium pric riss, by dfinition th currnt markt pric is too low, and thrfor thr is xcss dmand. At disquilibrium prics th 14 12 1 8 6 4 2 shortst sid of th markt dtrmins th quantity of land tradd: (3) Q = min( Q d, Q s ) This implis that th quantity of land tradd is lowr than in quilibrium as long as th markt is out of quilibrium. Basd on th prcivd xcss dmand, dmandrs will adjust th pric at which thy ar willing to buy: d s (4) P + 1 = ε ( Q Q ) Bcaus markt participants xpct incrasing prics to continu, land supplirs will wait till th xpctd pric incras is ralizd. During th procss of pric adjustmnt, bcaus of spculativ xpctations of furthr pric incrass, thr may b also xcss dmand if th pric is abov th quilibrium pric. Th furthr th pric is abov th quilibrium pric, th mor land supplirs start to tak thir profits, incrasing th numbr of transactions and rducing th ris in land prics. Th highst numbr of transactions will tak plac whn th pric is at its maximum. Th dcras in th ris in land prics in combination with th awarnss that land prics ar too high compard with th quilibrium pric, gnrats a dcras in th quantity of land dmandd. Th markt is in xcss supply and th pric dcras will stimulat potntial buyrs to wait till th pric dcras is ralizd. According th sam mchanism as whn th pric was rising towards th quilibrium pric, th adjustmnt procss will ovrshoot, and a nw, cycl may start. Whn participants on th markt bhav according to rational xpctations (i.. at a α 1 and β 1 around 1 and a low α 3 and β 3 ) th pric fluctuations outsid th quilibrium pric will b vry small. In th ral world thr is imprfct information on th land markt, and thrfor pric fluctuations can b much largr. Land pric (197 $) 12 1 8 6 4 2 1979 1973 1978 197 6 11 16 21 26 31 Tradd Ara Figur 3. A land markt cycl for 197-1986? 1986 1. 1 All variabls ar logarithmic.
3 Land pric (197 $) 12 1 8 6 4 2 24 1995 2 6 11 16 21 26 Tradd Ara Figur 4. A land markt cycl for 199-26? 26 199 Figurs 3 and 4 2 show Dutch land prics and quantitis. Ths figurs suggst that thr may b somthing lik a land cycl in th Nthrlands. Th tradd ara is only th land tradd btwn farmrs 3 and th ral land prics ar th avrag prics pr ha of ths transactions, dflatd by th GDP pric indx. Somthing lik a cycl is suggstd in figur 3, whr for xampl aftr 1978 a dcras in pric starting from th top is accompanid with a dcrass in th tradd ara, whil aftr a dcras in pric th numbr of transactions incrass. Both facts ar consistnt with Søgaard s thory. Nvrthlss, also a lot of lmnts of th pric-trad ara rlationship ar not immdiatly consistnt with th thory. This may b xplaind by th larg numbr of shocks during both priods (two oil criss, two rcssions, inflation) that may hav changd th conditions on th land markt normously. Thrfor, th challng is to modl th xtrnal conditions rlvant for th land markt and to tst for th dynamics involvd in th Søgaard modl. III. 3. AN ERROR CORRECTION MODEL OF THE LAND MARKET Th rducd form of th Søgaard modl can b dtrmind by substituting quations (1) and (2) in quation (4): P + 1 = ε ( α β + ( α1 β1)( P P ) (5) ( α 2 β2) P ( α3 β3) P) Søgaard assums that α 2 quals β 2, and w may assum that also som changs in xognous variabls may influnc xpctations and hav a dirct influnc on tmporary supply and dmand conditions. In first instanc w will focus on two xplanatory variabls, i.. th ral intrst rat and th ral gdp. Th long-trm ral intrst rat obviously influncs land prics as it is an asst whr its valu is dtrmind by th nt prsnt valu. It may also hav a 2. 2 Data ar from Luijt, 27. 3. 3 For figur 3 includd complt farms, in figur 4 only land. short-trm ffct, bcaus it influncs th amount of mony popl can borrow. Gross domstic incom may influnc land dmand in two ways. First, dmand for land for non-agricultural us may ris, incrasing land dmand and stimulating spculation. Scond, local dmand for agricultural products riss, and thrfor agricultur may bcom mor profitabl. This is a long-trm ffct. If w includ th two variabls in an rror corrction modl of th land markt, thn th following quation mrgs 4 : P+ 1 = γ γ 1( P γ 2Y γ 3r) (6) + P + Y + r γ 4 γ 5 + 1 whr Y is ral GDP and r is th ral long-trm intrst rat. 5 Bcaus th long-trm ral intrst rat may fluctuat a lot a wightd avrag of fiv yars is usd for th quilibrium part of th formula. Th stimation rsults of this quation for 1975-25 (tabl 1) show that all cofficints ar significant and with th corrct sign. Figur 5 shows that th dynamics of th land markt pric is capturd rlativly wll by th modl, whr th quilibrium pric is much mor stabl than th prdictd pric. Tabl 1. Estimation rsults γ 6 + 1 Log(Ral Land pric) Variabl Cofficint T-ratio γ : Constant.27.4 γ 1 : Adjustmnt cofficint -.39-5.9 γ 2 : Long-trm GDP cofficint.29 2.2 γ 3 : Long-trm ral intrst rat -.7-4.9 cofficint γ 4 : Laggd chang in ral land pric γ 5 : Short-trm chang in GDP cofficint γ 6 : Short-trm chang in ral intrst rat cofficint Adjustd R 2.84 D-W 2.3.39 4.1 4.32 5.2 -.2-2.4 4. 4 Aftr simplifying all combind cofficints, and using th Søgaard assumption. 5. 5 Th only variabl that is not a logarithm.
4 Ral land pric 14 12 1 8 6 4 2 197 1975 198 1985 199 1995 2 25 Yar Figur 5. Actual and prdictd land prics Actual pric Prdictd pric Equilibrium pric If th stimation of th land markt dynamics is corrct, thn about 4% of th chang in land pric is takn into th nxt priod. This suggsts that thr bubbls, consistnt with othr rsarch (Engstd, 1998; Fathrston and Bakr, 1987; Roch and McQuinn, 21). Th diffrnc btwn th ral pric and th quilibrium pric may provid a good indication of th probabl dvlopmnt of th land pric, and a fund for buying land can profit from ths fluctuations. IV. 4. THE LAND MARKET CYCLE AND MONOPOLY POWER A land markt is charactrizd by imprfct comptition. It is difficult to buy th land of your nighbour, and that is what you nd if you want to incras th siz of your farm. Cottlr t al. (27) xplain local land prics by urbanization ffcts and monopoly powr, dfind as th diffrnc btwn th numbr of buyrs and sllrs dividd th sum of sllrs and buyrs. Th ffct is significant and rlativly high for land in th countrysid. This could hav consquncs in th contxt of th Søgaard modl, bcaus this modl xplains larg fluctuations in total land dmand and supply. If th ffct of monopoly powr of buyrs and supplirs would work out ovr tim in th sam way as ovr spac, th monopoly powr variabl could fluctuat btwn about.5 and 1, implying that whn prics ar rising and supplirs ar waiting to sll, thy hav th ability to st prics about 25% highr than normal prics. If prics ar dclining, prics may b 25% lowr than in quilibrium. This ffct may b part of th mchanism in th rror corrction modl nxt to xpctation formation that is assumd in th Søgaard modl. V. 5. FARM INCOME AND GOVERNMENT EXPENDITURES ON LAND Th rror corrction modl of sction 3 is not compltly satisfactory in th sns that you would xpct that agricultural dynamics influncs th land markt, not only GDP, whil you would xpct also that govrnmnt dmand for land influncs th land markt. Both hypothss hav an important policy rlvanc. Th first has implications for th ffctivnss of farm incom policy, whil th scond is important in th discussion to what xtnt govrnmnt xpnditurs on th land markt dstabilizs th land markt. An invstigation of both hypothss is discussd in this sction. First, dmand for agricultural land will b dtrmind by th rnt on marginal rnt. At last sinc th 197s it is xcptional that complt farms ar sold; most transactions considr land, and land is dmandd to raliz conomis of scal. Thrfor th valu of th xtra land is important, and this implis that avrag farm incom is not rlvant as an xplanatory variabl. Th problm with th concpt of th rnt of marginal land is that it is not asy to masur. W trid svral stimats of marginal land rnd basd on th stimation of production functions, but nithr workd out. This is consistnt with som litratur (Falk and L, 1998; Moss and Katchova, 25), but othrs find significant ffcts of land rnts on prics (for xampl, Burt, 1986; Wrsink t al, 1999; Gutirrz t. al., 27). 6 An important rason bhind ths problms is that both for capital and labour imputd costs ar rlvant that ar lowr than th markt valu, but w don t know how much lowr. Dmand by govrnmnt of land is also not asy to find out. Part is organizd wll through an organisation spcializd on buying land, but also municipalitis and othr agnts buy land. Furthrmor, not all land dmand by th spcializd organization is a nt dmand; somtims this organization buys land in ordr to sll it latr in th contxt of an incras in fficincy of land us. Thrfor, th ral prssur on th land markt by this organization is not asy to masur. W hav trid to incorporat both diffrnt masurs of th profitability of marginal land and govrnmnt dmand for land in th quation, but did not find significant ffcts. Th lack of corrlation btwn farm incom and land prics is a fact that is also found lswhr, but it rmains rlativly unsatisfactory. Thrfor, an attmpt will b mad latr to improv th indicators of th marginal land rnt. 6. 6 Søgaard vn found an incorrct sign for land rnt.
5 VI. CONCLUSIONS GDP and th ral intrst rat in combination with an rror corrction mchanism that may b rlatd with imprfct information but also with monopoly powr, sms to xplain land pric bhaviour in th Nthrlands btwn 1975 and 25 rlativly wll. If th modl is corrct, thr ar opportunitis to sav mony on natur policy through a bttr timing of govrnmnt land dmand, and such a policy may stabiliz th land markt. This last ffct has not bn shown, but this may b causd by incorrct spcification of th modl. Thrfor, in th final papr xplicit tsts on xognity will b prformd and possibly a vctor autorgrssion stimation formulation will improv rsults. Also improvd data may improv rsults. Till w hav solvd this problm, w hav to b carful with rspct to conclusions about th ffct of govrnmnt land dmand bhaviour on th land markt. 1. Roch, M.J., and K. McQuinn (21), Tsting for spculation in agricultural land in Irland, Europan Rviw of Agricultural Economics 28(2): 95-115. 11. Schmitz, A. (1995), Boom/Bust Cycls and Ricardian Rnt, Amrican Journal of Agricultural Economics 77(5): 111-1125. 12. Søgaard, V. (1993), Th land markt cycl, Europan Rviw of Agricultural Economics 2(1): 65-76. 13. Tgn, A, and F. Kuchlr (1991), An rror corrcting modl of farmland prics, Applid Economics 23: 1741-1747. 14. Wrsink, A., S. Clark, C.G. Turvy, and R. Sarkr (1999), Th ffct of agricultural policy on farmland valus, Land Economics 75(3): 425-439. REFERENCES 1. Awokus, T.O., and J.M. Duk (26), Th causal structur of land pric dtrminants, Canadian Journal of Agricultural Economics 54: 227-245. 2. Burt, A.R. (1986), Economtric modling of th capitalization formula for farmland prics, Amrican Journal of Agricultural Economics 68(1): 1-26. 3. Cottlr, G., J. Luijt, J.W. Kuhlman, and K.G. Gardbrok (27), Oorzakn van vrschilln in grondprijzn: n hdonisch prijsanalys van d agrarisch grondmarkt, WOT-rapport 41, Wagningn. 4. Engstd, T. (1998), Do farmland prics rflct rationally xpctd futur rnts?, Applid Economics Lttrs 5: 75-79. 5. Falk, B., and B. L (1998), Fads vrsus fundamntal farmland prics, Amrican Journal of Agricultural Economics 8(4): 696-77. 6. Fathrston, A.M., and T.G. Bakr (1987), An xamination of farm sctor ral asst dynamics: 191-85, Amrican Journal of Agricultural Economics 8(4): 532-546. 7. Gutirrz, L., J. Wstrlund, and K. Erickson (27), Farmland prics, structural braks and panl data, Europan Rviw of Agricultural Economics 34(2): 161-179. 8. Luijt, J. (27), Stratgisch gdrag grondignarn, WOT-rapport 38, Wagningn. 9. Moss, C.B., and A.L. Katchova (25), Farmland valuation and asst prformanc, Agricultural Financ Rviw 65: 119-13.