What Moves the German Land Market? A Decomposition of the Land Rent-Price Ratio

Jana Plogmann, Oliver Mußhoff, Martin Odening, Matthias Ritter

Published: 28.02.2020  〉 Volume 69 (2020), Number 1, 1-18  〉 Resort: Articles 
Submitted: N. A.   〉 Feedback to authors after first review: N. A.   〉 Accepted: N. A.

ABSTRACT

The price increases on agricultural land markets over the last decade have triggered a debate about land as an attractive investment opportunity for agricultural and non-agricultural investors. In a static environment, the rent-price ratio provides a first indicator of the profitability of an investment in land. In this paper, we apply the dynamic Gordon growth model to Western Germany and decompose the rent-price ratio into the expected present values of rental growth rates, real interest rates, and a land premium, i.e., the excess return on investment. This analysis reveals that the recent price surge on agricultural land markets was not unprecedented; that the land market rent-price ratio is rather low and varies considerably among federal states; and that (expected) premia for land are mostly negative. Finally, we find that changing expected present values of returns on land investments are the major driver for land price volatility.
CONTACT AUTHOR
JANA PLOGMANN
Humboldt-Universität zu Berlin
Department of Agricultural Economics
Unter den Linden 6, 10099 Berlin
e-mail: jana.maria.plogmann@agrar.hu-berlin.de
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