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Bundle of rights explains planning and prices

I have never heard the phrase 'bundle of rights' used in any property market discussions, yet the principle forms the legal basis of property itself.

Put simply, when one buys property they are actually purchasing a bundle of property rights associated with that land title. These rights are granted to the title holder by the State. This bundle of rights approach allows us to distinguish between, and appropriately value, different types of tenure, such as freehold and leasehold, and for differing levels of planning regulation, native title rights, and rights to minerals (which even freehold land owners does not have rights to).

When you value property, you value just those rights that are granted to the title holder by the State. A block of land where the title grants a pastoral lease with 10 years remaining will be valued differently if it was a freehold parcel. Changing the legal rights of the owner may vastly change the market value of the property because the property is different – it is a different set of rights, even though the physical land has not changed.

And so we move on to town planning. Local governments have the power to decide what rights, in terms of land use and scale of development (amongst other things) to grant to which parcels of land through their planning regulations.

When people argue that town planning restricts land market activity and leads to higher values, they are generally confusing basic economic theories of production with fundamental theories of valuation of property rights.


As the RBA's Anthony Richards proclaimed -

However, supply-side factors should have a much greater influence on prices towards the fringes of cities, where land is less scarce and accounts for a smaller proportion of the total dwelling price. In principle, the price of housing there should be close to its marginal cost, determined as the sum of the cost of new housing construction, land development costs, and the cost of raw land. And in the absence of any restrictions on supply, the price of raw land on the fringes should be tied reasonably closely to its value in alternative uses, such as agriculture. So unless there has been a marked increase in the value of this land when used for other purposes, the availability of additional land towards the edges of our cities should have limited increases in the cost of housing there.


Richards is essential arguing that prices for land are determined not by the highest and best use available under its own bundle of property rights, but by a second best alternative use. This is a logical absurdity which is easily demonstrated to be nonsense.

For starters, why isn’t the value of agricultural land itself tied to its next best alternative use... which would be... umm... some less productive form of agriculture. Which itself should be valued at close to its alternative use which is...umm... nothing?

And what of the value of land for high rise commercial buildings? Should it be reasonably tied to the value of land for multi-storey residential? Which is in turn tied to the value of single detached residential, and so on.

If this logic applied in reality, no land would have value because it is all costless to produce and there are always lower value uses. We would only value improvements to land.

What happens in reality is the exact opposite – all land has value because it has a bundle of rights which the owner can use to their own private advantage. Land values are the residual value of the location benefits of the highest and best allowable use of the land, less the capital costs required to establish that use.

It is pretty clear that "House prices determine land prices, not the reverse, because the builder's estimate of the selling price of the building will largely determine his bid for the piece of land”. Indeed, the house price itself should be determined by its rental value which arises from the actual interaction of supply and demand for housing in the market.

As I have said before, land goes to its highest value use not by competing with other uses, but by competing buyers who want to use it for the highest and best use. There doesn’t need to be a secondary alternative use to create value.

So if all land zoning is removed who are the most likely buyers going to be?

In some areas, perhaps commercial users would outbid residential users, driving up the value of land for residential use in that area. This often happens when zoning is changed. This clearly demonstrates that strict zoning laws can reduce the value of residential land if competing uses, which are not part of the bundle of rights, would outbid residential users for that land.

This type of ‘free zoning’ would see high value uses muscling in to inner city locations, and ‘pushing’ residential land uses into the fringes. These fringe residential uses will also push up prices for rural and agricultural uses.

Whether that results in cheaper average prices for homes I don’t know, but it would definitely result in inferior locations for the housing market as a whole, so any price declines must be seen in the context of quality declines.

Changes to land zoning are changes to the bundle of rights of property owners. As a general rule, increasing the rights increases the value of the land, while decreasing the rights (limiting the scale of allowable development) has the direct result of decreasing the value, since buyers are purchasing fewer rights.

18 comments:

  1. Cameron, you have a real gift for providing analytical frameworks. My visits here have really sharpened my grasp of land economics.

    Here is a really important insight this time: yes, SOME land IS worth "nothing" and this DOES keep the price of land in the "least valuable use", usually farming, lower than it otherwise would be if ALL land WAS "worth something".

    Think about just HOW CHEAP farmland IS. $5000 US per acre is typical, almost anywhere in the developed world. Most farm produce sellers in international markets are helpless "price takers". The trend in international terms of trade has been steadily against farming products. It would be unrealistic to expect the price of farmland to rise most places.

    US $5000 per acre represents the income potential of this activity. Thousands of acres typically earn someone no more than a modest income. If the world ran out of farmland to produce the amount of food the world population could afford to buy, a lot of the land currently worth nothing because it is marginal, would become worth something. Presumably eventually ALL land that COULD be farmed, would be, and all this land would be worth something, in contrast to the amounts of it that currently are worthless.

    The price of farmland would start going up. The "least valuable" uses, the lowest yield, lowest value crops, would probably not be grown any more. We are nowhere near this point in the world currently.

    Notice, I am using your framework, only working backwards.

    End of instalment 1. - Wodehouselee

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  6. Yes, the price of land for farming WILL balance out according to the LOWEST value crop for which there is still demand, after demand for the higher value crops has been satisfied. Otherwise the whole world's farmland would be used only for growing the highest value crop, whatever that is, and would be higher priced than it is. But people require variety, and the free market sorts out the value of produce and the value of land.

    If the government decided to allocate "parcels of rights" to people who wanted to use the land for sheep or dairy farming, before they were allowed to use the land for sheep or dairy farming, because the government wanted to "preserve croplands", what do you think that might do to the price of land for sheep or dairy farming? And the price of milk and red meat in your country? And the future equilibrium levels of supply and demand for milk and red meat, and for land accompanied by "parcels of rights" to conduct sheep or dairy farming?

    Your whole "parcels of rights" discussion framework is an excellent framework for discussion of "how government interference distorts markets", not how "the price of any parcel of land is determined by its highest value use" as you are trying to make it.

    End of Instalment 2

    - Wodehouselee

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  9. Dear readers, please try and follow my posts in the order I intended them to be. I am having a foul job with this blog deleting previous posts every time I post a follow-up one.

    - Wodehouselee

    INSTALMENT 3.

    Your description of the various urban users of land under a free market, is PARTLY correct. The "CBD" area's typical commercial activities will always be able to out-bid residential (except the wealthy people's condos etc) for space at the best locations. But you worry too much about this. It is still highly efficient to have the commercial uses occupying the high density core, and high density residential adjacent to it. High density commercial uses cannot possibly occupy any more than a fraction of urban land - it is impossible to have an economy where everyone is an accountant or a lawyer.

    In fact, most "employer" uses of land have a land per worker requirement somewhere between farming and "accounting and law". The majority of employment types have long since been squeezed out of urban cores. Manufacturing, warehousing, retailing, medical, education, recreation, transport, etc etc. Most people can much more easily live near their jobs in real life, than in a planners make-believe city where all jobs are in the centre.

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  13. Hey wodehouselee, let me recover them from the comment spam.

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  14. wodehouselee, mate, you can't really still believe that stuff.

    "Yes, the price of land for farming WILL balance out according to the LOWEST value crop for which there is still demand, after demand for the higher value crops has been satisfied. Otherwise the whole world's farmland would be used only for growing the highest value crop, whatever that is, and would be higher priced than it is."

    This is the very point that Richards made that I have challenged repeatedly. If the value of the land was derived from the lowest value crop, wouldn't someone be able to walk up and buy it and start growing a higher value crop and make outrageous returns? And why isn't the lowest value crop growing absolutely nothing? IN which case all farmland should be worthless.

    I also disagree that "SOME land IS worth "nothing" and this DOES keep the price of land in the "least valuable use"."

    No land is worth nothing unless there are debts or other obligations attached to it that outweigh returns. All property has value is a basic principle of valuation. The fact that the value is low does not mean it is not valued at its highest and best use.

    In western qld there are grazing properties with a value of <$100/acre. So what is the lowest and highest value use there? The lowest value use is to DO NOTHING. The highest value use is grazing, and that the the value of the land for that purpose.

    Have you any examples where land is sold for a price reflecting its lowest value use? Anywhere in the world? Ever? I'd like to buy some.

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  15. So Cam. According to your logic, if zoning were eliminated, allowing land to be used for any purpose that the market desired, fringe land currently zoned non-residential or outside of the urban growth boundary (UGB) would suddenly increase to current urban prices?

    This view is not only illogical but incorrect. The amount of non-urban land in Australia is many multiples larger than urban land, meaning that the correct and logical outcome from the elimination of zoning/UGBs is that urban land would fall in price whereas non-urban land may rise marginally (if at all).

    If you want to see how these conditions play out in the real world, look to Houston (Texas) which is the only large urban area in the US the have no zoning outside of the urban core. Fringe land prices have remained stable ($30k-40k for a typical 600-1000sqm SERVICED block) for many years, with new home prices remaining steady at $120k to $160k (depending on size/features etc).

    How is it that fringe land in Houston has not automatically defaulted to a higher level as you claim must happen under your bundle of right framework?

    You need to abandon your Ricardian view of the land market (where the amount of land available for development is fixed and prices are only determined by the level of demand) and join the real world. The conditions that you have outlined in your post only apply when land supply is ARTIFICIALLY RESTRICTED by government policy and do not hold under normal free market conditions where the amount of land available for development is abundant and there is competition between land uses.

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  16. Ah, there is another "Anonymous" above. That was not me, but he knows his stuff, whoever he is. Anthony Richards knows his stuff too. To address your specific points:

    "......If the value of the land was derived from the lowest value crop, wouldn't someone be able to walk up and buy it and start growing a higher value crop and make outrageous returns?......"

    Cameron, you think this because you are an environmentalist and you utterly misjudge the MASSIVE amounts of land available on earth. I already explained that the land is NOT ALL used for growing the highest value crop, because there is simply not that much demand around the world FOR the highest value crop. Somewhere along the line, rising supply of the "highest value crop" causes the price to fall to a point where the "next most valuable crop" becomes worth producing - and so on down the line. The market sorts out the uses of land according to the demand for the products of its use.

    Somewhere down the line there WILL be uses of land that have "dropped out of the world economy" because they simply cannot match the returns from a close enough substitute product. But someone, somewhere is still growing "spelt", because there is a little demand for it. But there is enough land on earth at the moment, to allow for thousands of varying value uses without too many of them being "priced off".


    - Wodehouselee

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  17. You say:

    "In western Qld there are grazing properties with a value of <$100/acre. So what is the lowest and highest value use there? The lowest value use is to DO NOTHING. The highest value use is grazing, and that the the value of the land for that purpose.

    Have you any examples where land is sold for a price reflecting its lowest value use? Anywhere in the world?"

    The existence of $100 per acre land, proves that the world is nowhere near running out of farmland yet. So does the existence of land with "zero" value. In fact, there is a lot of land with NEGATIVE value - this representing the cost required to get it productive at all - desalination plants, irrigation schemes, etc. Peppercorn sums can be paid as "legal consideration" in these cases. If the world was genuinely short of land, the price of food would rise and so would the price of land - the land worth $100 per acre might come to be worth $200, and some of the "negative value" land might get massive irrigation projects brought to it.

    The existence of $100 per acre land keeps the price of $200 per acre land at $200, and so on ad infinitum. The existence of nil value and negative value land, keeps the price of <$100 per acre land at <$100. Building a building on any of THIS land, does not make the PURCHASE PRICE OF THAT LAND FROM ITS CURRENT OWNER IN ITS CURRENT USE, any higher. The same COULD and SHOULD apply at or near the urban fringe. "Leapfrogging" is the vital factor that WOULD ALWAYS prevent any one landowner from "holding out" and holding the whole market to ransom.

    Again, because you are an environmentalist, you underestimate the "quantity of land" relative to the rate of urban growth; and the sheer unviability of any "monopoly" of "developable" land.

    - Wodehouselee

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  18. A question for wodehouelee and anon,

    There are two islands. Island 1 has 1million people and Island 2 has 2million people. They are both 100,000sqkm and have no zoning laws at all.

    Assuming each island has the same average per capita income, wealth, productivity, interest rates etc, should there be a difference in the price of homes between islands?

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