What does the price of land tell us about the future trend in house prices?

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April 8th, 2016

The price of land fundamentally depends on the expected price of housing and the construction costs. It therefore provides extremely valuable information about the expected trend in house prices in the short and medium term1 and now that we are witnessing a significant change in trend in house prices, the information provided by an analysis of land prices has become even more useful.

Historical data on land and house prices in Spain show a very close correlation between both variables, to the extent that the price of the former determines 92% of the variability in the price of the latter one year later (see the first graph).2 After the adjustment that began in 2007, the price of land reached its lowest level in 2014 Q1 and posted its first positive year-on-year growth figure at the end of 2014. House prices, however, bottomed out later and did not start to post even slightly positive growth rates until 2015 Q2. Given that the price of land grew by 4.5% in 2015, and assuming its historical relationship with house prices is still in play, we estimate that the latter will rise by around 3% in 2016 for the whole of Spain.

However, the heterogeneous nature of the trend in land prices between provinces observed in 2015 suggests that the trend in house prices will continue to be disparate in 2016. In particular, in those areas where more than 10% growth in land prices has been seen (such as Madrid, Vizcaya and the Balearic Islands), and given the relationship between both land and house prices at the level of province, house prices could increase, on average, by 4% in 2016. On the other hand the price of land fell in 24 of the 50 provinces in 2015, suggesting that house prices in these areas might continue to adjust in 2016. This is the result of the difference between provinces in the stock of new residential properties available for sale: provinces with a lower stock of homes are seeing larger increases in land prices and we therefore expect them to also see larger increases in house prices this year.

In conclusion, the recent trend in land prices points to house prices gaining traction in the coming quarters although the speed of their recovery will remain disparate between the different provinces in the short and medium term.

1. See García Montalvo, J. (1999), «El precio del suelo: la polémica interminable», Nuevas Fronteras de la Política Económica, CREI and La Vanguardia.