Do land values lead house prices?

05-12-2005

Common sense suggests that a sustained upswing, or downswing, in house prices should be followed by a synchronous movement in land prices. But how fast do land prices react to house price movements, and to what extent?

Using Absa’s quarterly residential data for house prices and serviced erf prices, two facts are immediately evident.

“Firstly, serviced erf prices react quickly to increases or decreases in house prices, while, secondly, erf-price growth tends to be more volatile than house-price growth, “ says Garth Johnson, editor of Rode’s Report.

He adds, however, that this comparison relates to the value of serviced erf prices only, and that in the case of unserviced land, prices might be much more leveraged. For instance, in recent times holders of unserviced land with potential for residential township development potential experienced much greater capital appreciation than did house-owners.