Land has historically been seen as an appreciating asset, with the adage “they aren’t making any more of it” commonly used to justify ever-rising prices. However, the idea that land prices will always increase is an oversimplification. Here are some key considerations when evaluating the future value of land.
Supply and Demand
Like any asset, the value of land is primarily driven by supply and demand. If demand outpaces supply in a given area, land prices will likely rise. However, demand can fluctuate based on economic conditions, demographics, and land availability. An influx of supply, through new development or zoning changes, can also dampen price appreciation.
Population Growth
Population growth is a key driver of land prices. More people competing for a limited amount of land drives up values. However, population growth rates vary significantly by region. Some areas may experience rapid growth while others decline. Banking on continued population growth could be risky.
Location
Not all land is created equal when it comes to desirability. Land prices can diverge significantly between regions, cities, neighborhoods, and even blocks. Proximity to amenities, jobs, transit, and other locational factors greatly impact demand. Some locations will always command a premium, but changing preferences could impact relative values.
Economic Cycles
Real estate and land values are tied to economic cycles. In times of prosperity and growth, land prices boom. But downturns can significantly depress values. The global financial crisis of 2008 led to sharp declines in property values before prices recovered years later. Economic shocks can quickly change growth trajectories.
Mortgage Rates
Mortgage rates directly impact affordability and home prices. Low interest rates tend to drive demand and price appreciation. However, rates can rise quickly, as seen in 2022. Higher rates reduce purchasing power and soften prices. This dynamic applies not only to homes but the land they sit on.
Commodity Prices
For some land uses, commodity prices are a key value driver. Farmland values track crop prices, while mineral deposits like oil and gas can greatly increase land values. However, farming costs and drilling expenses can cut into profits. Commodity volatility brings risk to certain land investments.
Government Policy
Local, state, and federal policies can significantly impact land values. Zoning, land use regulations, infrastructure investment, tax policy, interest rates, and programs like the mortgage interest deduction all play a role. Changes to any of these policies could depress or bolster land values.
Zoning
Zoning determines what can be built on a parcel of land, dictating its potential uses. Restrictive zoning limits what developers can build, reducing land values. Upzoning to allow greater density increases potential returns and land price. Speculators often bet on zoning changes.
Property Taxes
Areas with high property tax rates increase carrying costs, weighing on demand. Places with low effective tax rates can see greater demand and price appreciation. Changes to assessed value calculations and tax rates can shift demand dynamics.
Alternative Asset Growth
Historically, real estate was considered one of the highest returning asset classes for investors. But other alternative assets like private equity, infrastructure, and commodities are seeing tremendous growth. A broader array of options could divert capital away from land and dampen price growth.
Pension Fund Allocations
Pension funds and institutional investors allocate large amounts of capital to real estate and land assets. However, newer alternative asset classes are competing for attention. Less institutional money flowing into land could impact prices at the margin.
Retail Investment Trends
Platforms like CrowdStreet and DiversyFund have opened real estate investing to everyday investors. But new fintech platforms offer exposure to other alternatives. Greater retail familiarity with assets beyond land could shift asset allocation preferences.
Climate Change
The impacts of climate change bring risks to land values in vulnerable areas. Rising sea levels threaten coastal lands. Extreme weather can damage properties and deter investment. Even the perception of risk can depress prices. However, climate-resilient locations may benefit.
Natural Disasters
Floods, wildfires, storms and other natural disasters accelerate due to climate change. Damage and destruction directly hit property values. But even the elevated risk of disasters in vulnerable regions impacts prices.
Sustainability Preferences
Eco-consciousness is growing among homeowners and investors. Properties with poor sustainability scores or high environmental impact may see values depressed. Meanwhile, green buildings and efficient developments command premiums.
Conclusion
While land has long been touted as a safe appreciating asset, its future value depends on a variety of interconnecting factors. Appreciation is not guaranteed, especially when looking at individual parcels or developments. Changing economic conditions, government policies, investment trends, demographics, and climate change all impact supply and demand dynamics. Investors should assess land opportunities carefully, not assuming guaranteed returns.