A study of the determinants of fattening and grazing farm land prices in New Zealand, 1962 to 1983

Abstract

During the late 1970's and early 1980's, the price of sheep and beef farms in New Zealand increased rapidly. From 1962 to 1983 the fattening and grazing land price indices compiled by the Valuation Department increased at an annual compound rate of 12.4 per cent. Over the same period the Consumer Price Index (CPI) increased at an annual compound rate of 8.6 per cent. This phenomenon has not been confined to New Zealand. In fact, the movement in New Zealand farmland prices appears to be lagged one to two years behind similar movements in United States farmland prices. I will examine the relationship between real land price and expectations of real income, real capital gains and the rate of inflation for sheep and beef farms over the period 1962 to 1983. To this end the investigation will be structured as follows. Chapter 2, will provide an overview of the land pricing issue. It will examine movements in land prices, net farm income, capital gains and the inflation rate between 1962 and 1983. Chapter 2 also includes an historical review of factors that may have affected farm purchasers expectations over that period. Chapter 3 reviews the literature relating to land prices. The discussion is broken into segments dealing with net farm income, capital gains, inflation and lastly debt and consumptive demand. In Chapter 4, three econometric models are specified that incorporate expectations of net income, capital gains and inflation. The first of the models is estimated in Chapter 5. In this model, land prices are specified as a function of expected net rental income where expectations are hypothesised to be formed adaptively. Several estimation techniques are discussed and reviewed and the adaptive expectations hypothesis is tested against the partial adjustment process. Chapter 6 reports the estimation of models two and three in which land prices are hypothesised to be a function of either expected net rental income and expected capital gains (model two), or as a function of net rental income and the expected inflation rate (model three). In Chapter 7 the findings of the study are summarised and implications for central government policy are discussed.