Price Discovery Between Residential Land & Housing Markets

Price Discovery Between Residential Land & Housing Markets
Sze-Teck, Lee and Joseph T.L. Ooi
Department of Real Estate, National University of Singapore
4 Architecture Drive, Singapore 117 566.
Proposed paper for presentation at the
2006 ASSA Conference in Boston, January 6-8, 2006
Preliminary Draft dated: 31 March 2005
This paper studies the causal relationship between residential land and house prices. It
essentially seeks to examine whether high land prices in urban areas are caused by
high property prices or whether the reverse is true, namely high property prices leads
to high land prices. The former hypothesis is based on the cost pricing theory of real
estate, whilst the latter is based on the conventional residual method of valuation. To
carry out the co-integration analysis, we first construct a constant quality price index
for urban land using the methodology proposed by Greenless (1980) and Clapp
(1990). The resulting urban land index is then matched against the residential property
price index to determine the dynamics of their long-term relationships. The results of
our Granger causality test modeled in an error-correction framework suggest that the
two series are integrated. The evidence seems to indicate that land prices lead private
property prices by approximately four quarters.
Key words: price discovery, urban land price, private residential market.