House prices - more than the building cost and land!

Components of house prices – an analysis

There appears to be some confusion about the components of house prices/values.  For example, a recent report by the Tony Blair Institute for Global Change on housing included a chart showing total house values apportioned between the value of the home (structure) and the land underlying the home for a number of countries. The report states “ Land now accounts for three-quarters of the total value of UK housing and the buildings only one-quarter – down from 44 per cent in 1995. To put it another way, the overall price of the UK’s housing stock is currently four times what it would cost to construct equivalent homes today.”  They conclude therefore that increasing the supply of land for new housing would by reducing land values, make housing cheaper.

 

It should be pointed out that the current methodology used by the Organisation for Economic Co-operation and Development (OECD) and the Office for National Statistics (ONS), of determining the value of the underlying land adopts a similar format. However, it can be argued that this approach is both simplistic and unsound, and is indicative of a lack of knowledge about the factors contributing to house values.

 

Components of house prices

If we move away from a two factor explanation what is the alternative?  The best way of looking at this is to break down the factors which contribute to non-construction/capital value of a property. A number of components can be identified. as set out below.

 

House value non-construction

The value of a house is more than the construction costs, other factors contribute to the value:

1. The location element –whether it is in a city centre, what amenities are available, the environment.

2. Additional demand arising from imported earnings/funds where people move into an area pushing up the price of a property.

3. The dwelling style - luxury dwellings will obtain a higher price than a run of the mill dwelling.

 

‘Basic land values’

The value of undeveloped land. This will vary by area being higher in built up areas than rural ones.

 

Development land value

The development land value is that value above the ‘basic land value’. It is largely derived from the value of land underlying existing dwellings in the area. This represents the accumulated impact of the factors pushing up values over time – the link between interest rates and asset values and increases in earnings.  It will vary by area. The development land value of a new development will gravitate towards that of existing developed areas.

 

 Taken together these factors contribute to the total value of a property. The non-building costs are, contrary to the assertion in the TBIGC report, do not arise from a lack of supply due to the planning system.

 

Conclusion

Total house price values reflect a number of components distinct from the construction cost. These are not a function of supply or the lack of it. The non-construction elements only exist because there is a dwelling on the site and someone wishes to purchase that dwelling.

 

So four components can be identified:

1) Non-construction/capital value of a property

2) House value non-construction

3) Basic land values

4) Development land value

References

Eurostat, 2015, Eurostat-OECD compilation guide on land estimation, Eurostat,  Manuals and guidelines.

Langengen, T,, Myers,J., Emersonn K.,(September 2024), ‘The Urgent Need to Build More Homes’, Tony Blair Institute for Global Change.

Office for National Statistics, March 2022, Improving estimates of land underlying

dwellings in the national balance sheet, UK: 2022, Article.