25 September 2018
As we look through various housing markets throughout the world, the component of land cost varies significantly; in California for instance, the land costs dominate; whereas in Vancouver and Dubai it’s the other way around. The reasons for these differentials are manifold, but what is more pertinent is to trace the evolution of land cost and construction costs over time in each of these markets (in cities and in certain communities), to ascertain the direction of prices.
The above graph illustrates land as a percentage of home values across various states in the US over four decades. In all three cases, California, Nevada, and Washington DC, the cost of land has outperformed that of construction over a period of time, whereby in DC and California, land tends to dominate the overall costs of a ”new build”; in Nevada (where arguably, the pace of urbanization has been lower relative to the land supply that exists), the trend is positive, implying that a similar outcome is likely over the next decade.
Given that land prices tend to dominate over time across communities and across markets, the determining factor for outperformance for investors becomes either a function of investing in suburban areas where prices are lower than the city center or invest in communities where land has become scarce and therefore difficult to develop.
In Dubai, there are far greater examples of the former, suggesting that the logical consequence of rapid urbanization is a continued allocation of resources in areas where the development is lower.
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