Land Leverage and House Prices

Abstract:     
A house is a bundle of land and improvements, with the weights of the two components varying both over time and across locations. We capture the land intensity or leverage of a property by measuring the ratio of land to total value. This is accomplished using transactions data for single-family homes in Switzerland over the period 1978 to 2008. We show how to use hedonic models to develop time series of land prices and land leverage. Then we estimate error correction models for both house prices and land leverage. We show the importance of incorporating land leverage when assessing the determinants of house prices. House price changes are shown to be affected by changes in land leverage, real GDP per capita, growth of the population aged 30 to 49, and the term spread, while land leverage changes are a function of changes in real GDP per capita, in real construction costs, and in the term spread.

Number of Pages in PDF File: 42

JEL Classification: R3

working papers series