On Land Price Formation: Bubble Versus Option

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Abstract:

This paper investigates the theory of land price formation, taking into consideration the fact that an “option” is implicitly attached to land. Using a theoretical model, it tries to explain the land price bubbles in Japan in the late 1980s as the result of investors' expectations of alternative uses of the land. The model is estimated and validated using data on the Tokyo metropolitan residential area. The modelling exercise also determines the extent to which the option contributes to the formation of land prices. It is shown that the separation of the land price from its fundamental value can be satisfactorily explained by the option property of land.

JEL Classification Numbers: C53, G12, R14.

Document Type: Original Article

DOI: http://dx.doi.org/10.1111/1468-5876.00113

Affiliations: 1: Yokohama National University, 2: Nagoya City University

Publication date: June 1, 1999

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