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The residual method of appraisal
What drives land prices up and down?
The price of land is a residual. If you're a builder, how much you're willing to pay for a parcel of land depends on how much you expect to sell the final building for, minus your construction costs (including profit).
If house prices go up, land prices will go up.
If construction costs go up, land prices will go down.
If interest costs go up, land prices will go down.
Rezoning a parcel of land, so that you can build more housing on it, increases its value. In Vancouver, whenever the city rezones a parcel of land, it negotiates with the owner to get about 70-80% of the increase in land value (through "Community Amenity Contributions").
Notes on the Residual Method of Appraisal from a UBC course:
If you were planning to buy this piece of land in order to build something and then sell the property for a profit, how much would you be willing to pay for the land? In this sense, the maximum you would pay for this land would be just enough so that the land cost plus the cost of improving the land exactly equals the expected proceeds of selling the property (of course,the cost of improving the property would have to include your required profit as the developer). Your maximum payment for the land is therefore the amount left over after paying all other costs associated with the development. This is the basis of the development method of appraisal; the price of land is determined by what developers of end use products can afford to pay after accounting for all costs of development.
The value of land under this appraisal method is therefore a residual amount resulting from the improvement of land. Any improvement that increases the value of the land's final use increases the land residual. For example, if house prices are increasing, with other costs remaining constant, land prices should rise. Similarly, anything that raises the cost of development lowers the land residual, and lowers the value of land. The cost of construction is therefore directly related to the value of land. Interest rates are also directly related, since financing charges form part of the cost of development.
I learned about this from a post on /r/PersonalFinanceCanada by /u/nmm66.