Over-valued or over-looked? A theoretical and empirical investigation of agricultural land values against profitability in Aotearoa New Zealand

Corey Allan, Suzi Kerr and Sally Owen

No 21087, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

Abstract: We investigate whether New Zealand’s rural land is over-valued when compared to its agricultural profitability. First, we develop a theoretical time-series framework showing that a positive profit shock in one agricultural land use should raise the value of land in that use, inducing land-use change. On average, the present value of expected future profits from national rural land should have a one-to-one relationship with the value of agricultural land when both are weighted by respective land use share. Second, we develop an empirical application using a new nationally consistent dataset of rural property sales and average agricultural profits for the period 1980-2012. Using a novel two-stage least squares approach to account for endogeneity, we find a positive relationship between the present value of expected agricultural profitability and rural land values. Furthermore, we cannot reject the hypothesis that this relationship is one-for-one, indicating that New Zealand's rural land does not appear to be over-valued. Our time-series methodology provides a roadmap for studies in other jurisdictions.

Keywords: Agricultural land; New Zealand; Agricutural profitability (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwecf:21087

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