Every year in my PPD 245 class, I try to help students do a couple of important things in urban economics. The first is to think spatially. I start them doing that with Ricardian rents and move into bid-rent gradients. The second thing I want them doing is understanding the difference between total home value, structure value, and land value. Henry George! My class is meant to be an early class, and so I start them working with Excel to learn to clean up and manipulate data. This little assignment I have them do uses Lincoln Land Institute data to explore how land value, structure value, and total home value varies over the course of about 10 years. It’s a really interesting exercise because if they are any good, they get to see this at the end, for four regions:
Now, ya gotta admit this is cool stuff, because as my colleagues Raphael Bostic and Chris Redfearn point out, wacky things happen when the ratio between land value and structure value get too far off. Notably, you have land that could be far more intensively used, and it isn’t. Henry George gives us some insights as to how tax policy can reinforce these problems.
You can see that here in San Francisco in the lead up to the 2007 crisis.
Meanwhile, go read you some of my brilliant colleagues’ work:
Bostic, Raphael W., Stanley D. Longhofer, and Christian L. Redfearn, “Land Leverage: Decomposing Home Price Dynamics,” Real Estate Economics 35 (2007), 183- 208.