As long as population continues to grow, the price of land will always appreciate, and in many cases property prices will tend to follow the same channel.
While the price of land may take anything from 5% to 20% of the overall price of a house depending on the location and total replacement cost of structures, the shift in farmland prices has been identified as one of the main indicators of property bubbles.
There are those who currently fear that we could be on the verge of another property bubble similar to the one that led to the global financial crises of 2008 and 2009, and looking at the housing price index below, it would be premature to dismiss those fears.
In 2007, the housing price index reached the highs of 373, and after dipping to well below 300 in the early 2010s, it has risen again to 350s level.
However, when you compare this trend with the one for the average price of a house in the U.S., there is a striking statistic weaved into the two graphs. The blue and the beige line represent San Francisco and New York, while the green line represents the average U.S. housing price movement.
This suggests that houses in New York and San Francisco cost miles above the country average, which illustrates the significance of location when it comes to house prices. Interestingly, when you try to look up listings of land for sale in North America, you will also find that land is most expensive in similar locations.
Now when we talk of location, the first thing that pops in investors’ minds is “the location of the house or property.” However, this shouldn’t be the case. The focus should be on “where is the land that the property is built on located?”
Because people invest in properties mostly, and not just land, housing prices tend to carry the plaudits when a bubble is mooted.
Right now, the average price of a house in the U.S. is about $186,000. However, in San Francisco, that figure is almost approaching a million dollars whereas in New York, it's almost $400,000. San Francisco and New York are among the top commercial zones, which makes land around those areas very expensive.
House prices around these regions have skyrocketed by more than 100% since 1980, and based on the current trend, that rapid increase isn’t about to stop. On the contrary, overall house prices in the U.S. have only increased by 18.4% over the last 36 years.
The average price of a house in San Francisco has increased by more than 160% while that of a house in New York is up about 115% since 1980.
CNBC reported that Farmland prices appear to have stabilized significantly over the last few years across several areas in the U.S. This has contributed to the overall stability of house prices as depicted by the average change in property prices. However, California has been a notable exception and this can also be illustrated by the nature of its massive jump in the average price of a house.
In the U.S., the price of land is tracked using farmland prices, which ties it to agricultural produce rather than housing and other property related investments. However, as illustrated in this write-up, there is more to farmland prices than just agriculture.
Conclusion
The rapid increase in farmland prices in California compared to the rapid increase in property prices in San Francisco can serve as a guide to how the price of land affects housing prices in the US.
Nonetheless, whenever a property bubble is mooted as is the current situation, housing prices will always be in the limelight, while land continues to feature as a behind-the-scenes catalyst.
Disclosure: I have no position in any stock or commodity mentioned in this article.
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