Factors affecting Land Value

How to define land value?

Land value can be defined as the monetary cost of the land. It can be the cost of undeveloped land or a built property, but land value is primarily associated with a vacant plot. When discussing the importance of a built structure the term “property value” is more appropriate.

Factors affecting Land Value – Important for comparison

The land value is determined by the economic principle of highest and best use of land which produces the highest net return in any term, over a period. The property value is dependent on the structural attributes, land rates, land use and the location of the land. It is determined by the specific character of the land such as land use, location, accessibility, aesthetics, etc. Factors affecting Land Value are of importance to calculate or estimate land prices, understanding of these factors will provide more accurate and realistic cost of land. These factors affecting Land Value do not necessarily give the exact amount but are helpful in comparison.

Factors affecting land value

Factors affecting Land Value mainly include the following:
1. Physical attributes: These include quality of location, topography, climate, availability of water, sewer lines, etc. More and better facilities are attributed to a higher price of land. Topography further has a direct effect on the construction cost and thus the overall development cost. The facilities thus developed on an uneven land will have a much higher cost as compared to the flat plain.

2. Accessibility to economic activities: The more easily economic activity is accessible, the more is the value of the land. For example, most of the metropolitan cities have the maximum land values at the center, or at the central business district of the city. This is because of the nearness to the economic activities and workplace. This factor affecting land value is the sole most important factor which led to the development of various land price models in urban economics.

3. Neighborhood amenities: The cost of land is also affected by the availability of the facilities such as shopping areas, medical facilities, school, parks& playgrounds, and other basic need of the humans. This helps in saving the time of people every day, the time saved adds up the cost of land. Also, the reduced travel and reduced trip distance will directly have the monetary benefits of the person residing in an area with many such facilities in proximity.

4. Present and future land use: The value of the land is also determined by the land use permitted in the land premises. For example, if we compare the values of two lands of same prices and same location but the land use permitted in the lands are different, one is commercial and one is residential. In such case the value of the land with the land use which has more rate of return over a period of time will be valued more. People are willing to pay a higher amount for commercial land, in some cases industrial or institutional land use might attract even higher prices.

5. Demand and Supply Function: With the significant demographic changes in the cities with time, the need for land also increases with the same factor, with the increase in population there is an increase in economic and other activities. This directly increases the demand in the of the land components. The anticipation of high yields may also induce false scarcity of land; hence the location advantages of the properties at any time within the urban boundaries and hence causes economic values of land to be increased. For any site, there are specific points of transition in use, closely related to the infrastructure and services, where a jump in property value is likely to happen.

6. Location and Transport Linkages: The property located in the area of high level of infrastructure facilities or the one located in or adjacent to the area of intensive economic activities such as markets or industries have higher values. Transport linkages are also crucial since they govern the mobility & ease of movement to and from the area. Clearly defined hierarchy of roads, efficient public transportation and lack of congestion are some of the desired transportation attributes of any area. Residential land values are also observed to be in direct proportion to the hierarchical order of the adjacent road.

The valuation of land is done keeping in mind the factor mentioned above; however, the actual selling price of an area is ultimately determined by the paying capacity of the buyer. All the factors mentioned above-affecting land value might give a price which no one is willing to pay, and thus the actual amount paid becomes the price instead of the evaluated price.

Read about: Relationship between Transit and Land UseRicardo theory of rentTheory of Comparative advantage

18 Replies to “Factors affecting Land Value”

  1. I have a question “how does the meaning of land value affect investment decisions?”

  2. Hello,
    Thank you for providing insight about it. We have not covered about how to integrate the land price info with other parameters since that needs to be done by specialists or specialised softwares. It will surely give more accurate info especially when fed with time series data and taking into account the inflation and major instances which affected the real estate industry.

  3. hello,
    How best can we have the accessibilty factor incorporated in database of land market values used to assess the stamp duty?, I will be grateful for the feedback

  4. @François Cazals-are there other factors that you are factoring in your project besides those stated above,share if you got a couple.Would like to hear if there was a breakthrough with the price ratios you asked about.

  5. We are glad to find that information provided by us is useful. Unfortunately We do not have any case study or data about land prices or quantitative relations but we would love to recommend a book “Urban Economics” by Arthur O’Sullivan, it deals with the land development and how prices are affected, changed and controlled due to various factors and forces. We are certain that this book will be helpful.

  6. Thanks a lot for clarifying; I am writting a dissertation which aim is to build a valuation tool that systematically evaluates land in the UK by using such rules of thumbs. If you had further information regarding quantitative relations that could allow us to quickly get an estimate, such as typical price ratios, I would be very grateful!

  7. The hierarchy of road (eg. Arterial, sub-arterial, local, street, national highway, state highway etc) has a direct effect on the land price. Road hierarchy directly influences the activities which can be carried out on the plots joining it and thus affects land value.

  8. Hello, very interesting article, what do you mean by “Residential land values are also observed to be in direct proportion to the hierarchical order of the adjacent road”?


  10. Thank you, good information. Only a few typos in the first point paragraph. Like ‘direct affect’ and ‘thr’. I think you intended “direct effect” and “the”.

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