Urban Land Rents in the United States

In this paper, David Barker proposes that economic models need to break out the value of land to support detailed economic analysis of over all property values. He points out both the importance and difficulty of measuring land values and land rent relative to personal income and net worth. A clear understanding of land values and the effect on prices helps with investment planning and tax policy.

First, Barker reviews past approaches to measuring land values. He cites many studies over the past 150 years that calculated land value as between 8 to 30 percent of national wealth. The percentage varies widely based upon the method used and economic conditions during those years. Small differences in assumptions and methodology can result in large differences in estimates of aggregate land values. Assessors have very little incentive to divide value accurately between land and buildings, because in the vast majority of jurisdictions the tax rate is the same for both. Recently regulatory constraints on development have contributed to

higher housing prices, which means that the price of developable residential land has increased.

The national trend in land value is analyzed using Federal Register Flow of Funds data to construct rough estimates of the value of land for the entire United States and for four U.S. cities of different sizes. Although the Federal Reserve no longer publishes an estimate of aggregate land values for the United States, it does list the total estimated market value of real estate held by households and businesses, as well as the replacement cost of structures owned by the same groups. Logically, land value should be the difference between these two items. After falling dramatically during the early 1990s, land values are now higher than they have been since 1952, with residential land values increasing the most rapidly.

These estimates are then compared with estimates obtained from vacant land sales in the cities of Los Angeles, Chicago, Philadelphia, and Dallas. The analysis showed that land values per capita, fall quickly and monotonically with metropolitan area population. Land value per capita is 2.7 times greater in Los Angeles than in Dallas. Land values in Los Angeles are high along the coast and generally decline with inland distance. Commercial property is more likely to be located on the highest-value land in a city, and the ratio of land to building value is generally higher for commercial property than for residential property.

In the past, residential land values have increased more than commercial values, probably because of the rising home ownership rate, encouraged by various government subsidies, which has increased the demand for land suitable for residential uses. Urban economics models suggest that land values are more elastic in relation to increases in population and income in city centers than elsewhere, and so it is possible that recent land price increases have been at least as great for commercial property as for residential property.

The land rent as a percentage of total city personal income can be calculated as well. Land rent is first estimated as total land value multiplied by the Baa corporate bond yield, as reported by Moody’s. Land is cheap in most of the United States. Rural areas and small towns have plenty of land, and the value of real estate in these areas is close to construction costs. The ratios of land rent to personal income for the four cities are: Los Angeles (0.22); Chicago (0.236); Philadelphia (0.147) and Dallas(0.275). Since land rents for the entire United States are equal to 13.6 percent of income, he concludes this percentage must be much higher in large cities.

The analysis shows that land rents are still a significant portion of personal income. In large cities, rents are a much larger percentage of income than in the rest of the country. The most reliable estimates indicate that land rents in large urban areas are between 15 and 27 percent of aggregate personal income. As urbanization rates continue to increase and as greater world wealth increases the demand for land, this percentage could increase still further.

The findings described in this chapter support American economist Henry George’s 1897 proposal to substitute a land tax for other taxes suggest that, at least in large urban areas, land taxes have the potential to provide a large fraction of government revenue. Barker concludes that land values still constitute a significant share of national wealth in the United States.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2006 and is Chapter 7 of the book Land Policies and Their Outcomes.