Determinants of Land Use and Property Value

Abstract

Urban land use and property values were once a weak link in economic theory. A lot of research has been done over the years on land use and property value but the basis or foundation of models used for property value analysis has not been illuminated. This has established the nexus between Alonso’s Bid Rent theory and the Monocentric City Model. A review of previous research works on the subject area was done. The data was obtained through documentary secondary sources. The findings from the review revealed that all the determinant factors of land use and property value revolve around the traditional hedonic postulation of willingness to pay (WTP) for structural, locational and neighbourhood attributes of property. These were based on Alonso’s Bid Rent theory and Rosen’s Hedonic Price Model reaffirming the link between them. The importance of utility, interest and willingness to pay (WTP) for property attributes will be better appreciated by real estate scholars and professionals.

Full text

RESEARCH ARTICLE Adv. Sci. Lett. 4, 400–407, 2015
1 Adv. Sci. Lett. Vol. 4, No. 2, 2015 1936-6612/2011/4/400/008
doi:10.1166/asl.2011.1261
Copyright © 2015 American Scientific Publishers Advanced Science Letters
All rights reserved Vol. 4, 400–407, 2015
Printed in the United States of America
Determinants of Land Use
and Property Value
Emmanuel S. Gwamna1, Wan Zahari Wan Yusoff 2, Mohd Firdaus Ismail3
1,2,3Department of Real Estate Management,
Faculty of Technology Management and Business,
Universiti Tun Hussein Onn, Malaysia (UTHM).
Urban land use and property values were once a weak link in economic theory. A lot of research has been done over the years
on land use and property value but the basis or foundation of models used for property value analysis has not been
illuminated. This has established the nexus between Alonso’s Bid Rent theory and the Monocentric City Model. A review of
previous research works on the subject area was done. The data was obtained through documentary secondary sources. The
findings from the review revealed that all the determinant factors of land use and property value revolve around the
traditional hedonic postulation of willingness to pay (WTP) for structural, locational and neighbourhood attributes of
property. These were based on Alonso’s Bid Rent theory and Rosen’s Hedonic Price Model reaffirming the link between
them. The importance of utility, interest and willingness to pay (WTP) for property attributes will be better appreciated by
real estate scholars and professionals.
Keywords: Land use, Property value, Bid rent theory, Monocentric city model.
1. INTRODUCTION
Land value stems from the fact that land is necessary
for construction, and buildings are necessary for most
kinds of production of goods or services and for some
types of consumption, such as housing1. Land originates
its value from the fact that is an indispensable input, or a
factor of production. The real estate value of land thus
comes from what is known as derived demand: people are
willing to pay for land not because of its inherent value,
but for the fact that it is necessary to achieve other things
that have consumption or production value.
Like most economic transactions, economic forces of
demand and supply, ceteris paribus, are expected to
determine the value of urban land. Generally, the relative
dearth of land allocated to various uses influences the
value significantly2.
If urban land supply is very responsive to demand,
there is the tendency to reflect the productive value of
land. However, if urban land markets cannot effectively
respond to demand pressure, land values will tend to be
much higher3.
*Email Address: emshega@gmail.com
With the bulk of research work done in the area of land
use and property value, the important aspect of defining
the basis or foundation of models used for land use and
property value analysis has not been illuminated. This
study hopes to fill this gap by establishing the connection
or link between the Bid Rent theory4 propounded by
Alonso and the contributions to the Monocentric City
Model5,6 by Muth and Mills.
The study will undertake a review of previous
research work done in the aspect of land use and property
values. This will be done in the light of established
theories of land use and urban economics.
The paper is structured as follows: the next section
will discuss the theoretical underpinnings of land use and
property value; section three will explain the research
methodology; review of previous research will be done in
section four, discussions will be in section five, while
section six will conclude the paper.

Adv. Sci. Lett. 4, 400–407, 2015 RESEARCH ARTICLE
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2. THEORETICAL UNDERPINNINGS OF LAND
USE AND LAND VALUE
The 19th century scholarly works of David Ricardo
and Johann Heinrich von Thünen both provided the
maiden theories on land use and land value. Though the
two theories are on opposing sides, most of the later
theories on land use and land value were based on them2.
While Ricardo’s economic theory focused on relative
productivity of agricultural land, the geographical theory
of von Thünen harped more on the locational qualities of
land in terms of its use and value.
Alonso developed one of urban economics’ critical
analytical tools7. In order to isolate factors attributable to
the household’s willingness to pay (WTP) for access to
the Central Business District (CBD) of an urban centre,
Alonso employed the concept of bid rent2.
In developing the bid rent function technique,
Alonso developed the earliest version of the traditional
Monocentric city model which extended von Thünen’s
model to an urban context. In Alonso’s version of the
model, urban households receive utility from land, along
with other goods. Land does not vary in any way except
that sites closer to the CBD offer households lower
commuting costs. In an attempt to avoid costly commutes,
households are willing to pay a premium for sites closer
to the CBD4.
Extensions of the model were later produced by
Muth5 and Mills6. These extensions added housing to the
model. Households do not get utility directly from land;
rather, they get utility from housing, and housing is
produced by combining land and capital. Although Muth
and Mills worked independently, this version of the
Monocentric city model is often referred to as the “Muth-
Mills” model. In this version of the model, house prices,
land rents, building heights, and population density all
decline with distance from the CBD5,6.
Fig. 1: Flow chart showing the proponents of the basic urban model
Source: Adapted from Arnott & McMillen7
3. METHODOLOGY
This study conducted a review of previous research
works regarding land use and property values. A total of
12 empirical research works were presented in a table and
analysed descriptively.
The bulk of the data used for this study was obtained
from secondary sources. The type of secondary data
adopted is the Documentary secondary data where
journals, articles, books and the World Wide Web (cyber
internet) were consulted for information. This type of
study is referred to as archival8.
Archived databases from research studies conducted
previously have increasingly become a source of archival
data for researchers9.
4. REVIEW OF PREVIOUS RESEARCH
A review of previous research on the aspect of land
use and property value determinants is presented in this
section. The review on the past studies was done to show
property value determinants in different economies and
across various property types.
Twelve earlier empirical research works are
presented in Table 1 which has columns with author and
country of study, issues studied, the methodology adopted
for the study, findings of the study, and remarks on the
findings of the study.
The objective here is to highlight the various
determinants of land use and property values in different
scenarios and deduce whether they fall within the purview
of structural, locational and neighbourhood attributes of
property.
Von Thünen’s
Theory
Alonso
Muth
Mills
Monocentric
City Model
Land Uses &
Property Values
Basic
Urban
Model

RESEARCH ARTICLE Adv. Sci. Lett. 4, 400–407, 2015
3 Adv. Sci. Lett. Vol. 4, No. 2, 2015 1936-6612/2011/4/400/008
doi:10.1166/asl.2011.1261
Table 1: Past studies on determinant factors of land
use and property values
5. DISCUSSSION
From the literature review of past studies on land use
and property value determinants, it can be seen that the
major determinant factors of land use and property values
fall within the classification of structural, locational and
neighbourhood attributes.
The willingness to pay for these attributes by a
household defines the interest shown on a property.
The concept of willingness to pay (WTP) to maintain
or achieve utility is very relevant to land use and property
value analyses, since in actuality, what really determines
land use is the interest in such land. The said interest
consequently creates demand which sustains property
values.
The widely used hedonic price modelling is based
upon the concept of willingness to pay (WTP) for the
AUTHOR/
COUNTRY
ISSUES
METHODOLOGY
FINDINGS
REMARKS/
COMMENTS
1.
Liew &
Haron10,
Malaysia
Factors influencing the rise
of house prices & their
level of influence.
Average indexing, T-
test and Pearson
correlation.
Construction costs; population growth,
long term profit of housing, growth of
GDP, & decline in supply of new
housing.
Economic factors have the
most influence on house
prices in this study.
2.
Dziauddin
et al.11,
Malaysia
Effect of Light Rail Transit
(LRT) systems on house
prices.
GIS, network analysis
& double log hedonic
model.
Properties close to the LRT station were
valued higher than properties situated
further away.
Impact of LRT station on
property values in line with
the bid rent function theory.
3.
Ong12,
Malaysia
Relationship between
macroeconomic variables &
the price of housing.
Multiple regression
analysis.
GDP, population & property gains tax are
the key determinants of house prices.
Population growth &
government policy are
important influencing
factors.
4.
Larsen &
Blair13,
U.S.A.
Effects of surface street
traffic externalities on
residential property price.
Hedonic regression
was used.
Single-family homes contiguous to an
arterial street were sold at a discount
while multi-unit properties contiguous to
an arterial street were sold at a premium.
Street traffic affects various
property types differently.
5.
Aliyu et
al.14,
Nigeria
Violent ethno-religious
conflict on residential
property values.
Percentage distribution
tables & regression
analysis.
Statistically significant relationship
between ethno-religious conflict &
people’s decision of where to live.
Conflict prone areas have
lower rental values due to
decrease in demand and
vice-versa.
6.
Uju &
Iyanda15,
Nigeria
Location & non-location
factors in the determination
of residential land values.
Stepwise regression
analysis was used for
data analysis.
Non-location factors, particularly the
time of land purchase, were the most
significant determinants of residential
land values than the distance variables.
Actual residential property
values should have been
used for better illustration
and comparative analysis.
7.
Kemiki et
al.16,
Nigeria
Impact of factory noise &
dust on rental values of
residential settlements.
Hedonic pricing model
was used.
Adverse externalities of dust & noise
diminished rent.
Dust & noise have negative
effect on residential rental
values.
8.
Adegoke17,
Nigeria
Factors influencing rental
value of residential
property.
Hedonic price model
of stepwise regression
basis.
The most influential factors in all the
areas were number of bathrooms, number
of living rooms & availability of burglar
alarm.
Structural attribute and
security are the most
important factors
influencing rental values.
9.
Famuyiwa
&
Babawale18
Nigeria
Inherent values of
particular physical
infrastructure in rental
values.
Semi-log (log-linear)
hedonic model was
adopted.
Power supply, good road conditions,
street lighting, pedestrian pavements,
good drainage systems, neighbourhood
security, & public waste removal
services.
Infrastructure & utilities
have a positive effect on
residential rental values.
10.
Emoh et
al.19,
Nigeria
Determinants of residential
land values.
Correlation, factor
analysis & multiple
regression analysis
Accessibility, neighborhood quality, land
title, zoning regulations, transportation,
improvement tax, view of amenities.
More emphasis was on
neighbourhood & locational
attributes determining
values.
11.
Oduwole
& Eze20,
Nigeria
Dynamics influencing rent
apartment prices.
Stepwise hedonic
regression with double
log model
Access road, number of rooms, number
of bathroom, lot size, electricity,
proximity to CBD, the presence of
schools & crime rate.
Structural, locational &
neighbourhood
characteristics are all
relevant.
12.
Oloke et
al.21,
Nigeria
Factors affecting residential
property values.
Tables, percentages &
relative importance
index.
Proximity to the highway, number & size
of bedrooms, conveniences, good roads,
drainages & security.
Structural, locational &
neighbourhood
characteristics are all
relevant.

Adv. Sci. Lett. 4, 400–407, 2015 RESEARCH ARTICLE
4
implicit attributes of property that enables it to give utility
or satisfaction to the property owner or user. This model
was amplified by Rosen22. The model centred on the
principle that the price/value of a commodity is de-
termined by the utility that the various attributes of the
particular product bears. When the property values are
regressed on the various housing attributes (structural,
location, neighbourhood), the empirical levels of the
coefficients of the various attributes constitute the
hedonic prices of the various features. The willingness to
pay for the attributes, therefore, determines the value or
price of the property.
The willingness to pay concept was first advocated
by Alonso’s4 bid rent function theory in tandem with the
Monocentric city model which includes the works of
Muth5 and Mills6.
The Monocentric city model propounded that land
values, house prices (rents) and population density all
decline with distance from the CBD.
Fig. 2: Foundation of models used for land use
and property value analysis
Source: Adapted from McDonald & McMillen23
Property characteristics which comprise of locational,
neighbourhood and structural attributes are represented in
the depiction of foundation of models used for land use
and property value analysis shown in Figure 2.
The primary consideration was distance to the CBD
(positive externality). People who could afford houses in
close proximity to the CBD (location) spent less on
transport costs to and from work and other public utilities
(neighbourhood). The houses there are of higher values
but have less lot sizes and space (structural).
Also, the vicinity of the CBD was crowded due to
the proliferation of human activities and competition for
space thereby causing a plethora of urban problems such
as overcrowding, traffic congestion, noise, and
contravention of urban planning (negative externalities).
People who could not afford houses in the vicinity of
the CBD had to secure residence away from the CBD.
These people spent more on transport costs to and from
work due to the distance but had more space and lot sizes
in their residential dwellings owing to less competition
and less crowd in such areas.
The willingness and the means to pay for utility and
satisfaction in various forms – accessibility, less transport
costs, more space, security and safety, public utilities and
infrastructure, conducive living environment –
fundamentally determined forms of land use and
residential property values.
Even with the current modern day complexities of
cities where several CBDs are found in an urban
settlement (Polycentrism), the dynamics of land use and
property value still revolve around the nearest CBD
(activity focal point) that exerts influence on properties
(essentially Monocentric effect).
6. CONCLUSIONS
The basic principles of land use and property value
which are essential in real estate discourse have been
discussed in this study.
It is pertinent to note that all the determinant factors
of land use and property value revolve around the
traditional hedonic postulation of willingness to pay
(WTP) for structural, locational and neighbourhood
attributes of property. Alonso’s bid rent function theory in
conjunction with the Monocentric city model first
conceptualised WTP to attain a certain level of utility for
residents in certain locations and the theory still remains
very relevant even with the inconsistencies later
discovered with regard to the distance-decay relationship
submission (Kabba & Li2; Levy & Lee24; Aliyu et al.14;
Brempong25; Uju & Iyanda15).
The study further established the nexus between the
Monocentric city model and Rosen’s Hedonic Price
Model. Modern land use and property valuation analytical
techniques are hinged upon this platform.
Real estate professionals in general and scholars and
researchers in particular will better appreciate the
importance of utility, interest and willingness to pay
(WTP) for attributes as very crucial in any real property
decision.
ACKNOWLEDGMENTS
This work was supported in part by Universiti Tun
Hussein Onn, Malaysia (UTHM) and Nigerian Tertiary
Education Trust Fund (TETFUND). The writers express
their profound gratitude to them for the opportunity.
ALONSO
MILLS
MUTH
BID RENT FUNCTION
THEORY
Land Values
MONOCENTRIC CITY
MODEL
Urban Land Use
Changes
Residential Property
Rental Values
Land Values
House Prices
Population Density
Land Values
House Prices
Population Density
Choice of Residential
location by Households
to maximize utility
Willingness to Pay
for Utility
by Households

RESEARCH ARTICLE Adv. Sci. Lett. 4, 400–407, 2015
5 Adv. Sci. Lett. Vol. 4, No. 2, 2015 1936-6612/2011/4/400/008
doi:10.1166/asl.2011.1261
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