Land speculation has been the driving force behind the surge in farmland prices across the country. For the past six years, farmland prices have been relatively flat with modest growth. However, recently land speculation has been driving prices upwards. News of Bill Gates becoming the largest farmland owner in the US has shown us that land speculation is attracting several high net worth individuals.
The surge in price is not only in the US, and not only in farmland. In fact, during recent years, both developed and developing nations have seen speculative property value increases. This has also led some to identify a housing bubble in Europe.
Inflation and its impact on land speculation
With inflation running high, investors scramble to find suitable investments to protect their capital. This has been the main reason behind the land speculation we have witnessed since the pandemic started. Farmland is absolutely essential for both developed and developing nations. Therefore, although this frenzy of farmland buying is seen as speculation, it is actually an investment focused on capital preservation.
Therefore, investors trying to protect their capital see investing in farmland as an efficient way of protecting their capital. Their belief is that even if prices rise across the board, so would the returns they would get on the land they invest in. This has been the driving force behind the recent land speculation in some areas of the world, and most notably in the US.
Investors are also taking advantage of record-low interest rates, and a commodity supercycle that seems to be underway. If it continues their returns on a conservative and defensive investment like farmland will certainly pay off.
Record-low interest rates driving land speculation
The record-low interest rates across the world have been the main driving force behind land speculation. Investors are able to borrow at extremely cheap rates. This low cost of capital makes it extremely enticing to leverage up and buy assets. Land speculation is an indirect consequence of this new macroeconomic environment that we are experiencing.
What are the real-world economic repercussions of land speculation?
This is a complicated question that is highly dependent on the particular region. Land speculation could directly affect the prices of agricultural commodities. As land speculators bid up farmland prices, this could directly increase the cost of farmers to rent or lease that land. Directly affecting their fixed costs. Farmers would then be forced to have higher fixed costs. This in turn could push agricultural commodity prices higher.
As agricultural commodity prices rise, so will most of the grocery bills. This comes as a direct effect that increases the cost of living for many families across the country. It could directly impact millions of families who struggle to pay their bills and could see their monthly expenses increase.
Land speculation is a worldwide phenomenon
Land speculation may seem like it is a phenomenon confined to only a few countries and certain economies. However it is widespread, and it has affected several nations. Usually, land prices rise secularly in tandem with other assets. An economic boom is usually followed by land price increases. However, the recent surge in land prices is fueled by investors trying to protect their capital and higher expected inflation.
When we analyze historically, a surge in land prices is usually tied to other improving economic indicators. This time that is not the case. In fact, due to the pandemic economic indicators have deteriorated abruptly. That did not stop land speculation from driving prices up. Although farmland prices have risen there is also land speculation associated with developers bidding up prices has also been impactful.
Looking at the land prices in London may help to contextualize the situation.
Land speculation in London
Even before the market collapse in March 2020, property prices in London had tripled and in some cases quadrupled, during the previous five years. Quality freehold property is currently priced around $50 per square foot in East London, and it could go as high as over $500 per square foot in some of the most prominent locations. London’s metropolitan area is roughly 600 square miles. The total price increase of all of London’s properties is estimated at $84 billion over the last 5 years. That equates to roughly 3% of the GDP in the UK in 2020.
Massive property price increases in Tehran
Although it may seem like London property prices are skyrocketing, it is not comparable with some other more exotic locations. Tehran is certainly not the international real estate investment hub most of us dream of. However, the surge in property prices is completely unprecedented. Housing prices have grown by 85% in Tehran, and it is perhaps the best example of how land speculation has been the driving force behind housing price increases.
Land prices could continue to rise
As the world adapts to this new inflationary environment, land prices are expected to continue to rise. This new economic reality will continue to push prices upward. As more and more investors try to protect their capital with defensive investments. Overall the available land is constant. With an increasing money supply, there is more money chasing the same assets. This in turn leads to higher prices across the board.
We could also witness an expansion of land speculation into unusable land. Some marginal areas of land could also be the stage for further land speculation. Extending urban areas to more remote locations. However, the most significant land speculation is confined to metropolitan centers where there is a supply constraint. Despite that, we have seen that it is expanding to farmland and could continue to do so.
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