The price of land

Trends in land prices

Most commentaries on Latin American cities sooner or later aver that land prices are excessively high. Many blame this problem on the process of land speculation and it is certainly true that far too many plots are being held out of the market in anticipation of a rise in price (Kowarick, 1988; Trivelli, 1987).4 They also emphasize how spectacularly land values are rising. For example, Allen (1989: 8), citing IBASE (1982), claims that "the average price of land in São Paulo quadrupled between 1964-1978, and in Rio rose by three and three quarter times its value." In Bogotá, FEDELONJAS (1988) claims that real land prices increased roughly six times between 1959 and 1988, and Villamizar (1982) that they increased annually by 4 per cent per annum between 1955 and 1978.

Until recently, the idea that land prices always rose rapidly in third world cities was conventional wisdom. Such a trend made sense. As Payne (1989: 45) puts it: "Under conditions of sustained high urban growth, urban land has enjoyed a level of demand well in excess of formally sanctioned supply, guaranteeing a good rate of return on investment." However, recent evidence has begun to detect signs of falling real land values in Santiago and in several Mexican cities (CED, 1990; Coulomb and Sanchez, 1991; Gilbert, 1989; Jones, 1991). Limited data from Guadalajara suggests that the Mexican recession had a strong impact on land prices. Between 1975 and 1980, the average price of peripheral plots rose in real terms by 14 per cent; between 1980 and 1985 it fell by 3 per cent (Gilbert and Varley, 1991: 93).5 In Puebla, real land prices fell spectacularly after the crisis broke in 1982 (Jones, 1991) and a similar pattern also occurred in Querétaro, Toluca, and Mexico City (Jones, Jiménez, and Ward, 1993; Coulomb and Sanchez, 1991). In Santiago, land prices in high-income areas of the city rose spectacularly between 1979 and 1982, only to plummet in the next few years (CED,1990).

If land values have fallen the reasons are fairly clear. As Durand-Lasserve (1990: 49) points out: "The contradiction between rapid land price increases and stagnant or declining urban incomes at least during the first phase of the crisis led to the erosion of the formal land market. This erosion is reflected in ... the outflow of capital from the land sector to either other economic sectors or to the up-market real estate business."

Whether changes in land prices matter depends in part on what is being measured. What precisely do average land values measure? Detailed work on an excellent data set of land prices in Bogotá demonstrate the problem perfectly: land prices between 1955 and 1988 rise during one longish period and fall during another; they shoot up one moment and fall the next. As such, the choice of time period is critical to analysis. Even more important is how to interpret the meaning of the average: what does an average land price rise measure when land prices rise rapidly at the periphery and slowly near the centre? Still more troubling is the fact that trends are very sensitive to changes in the way that the annual average is calculated. Dowall and Treffeisen's (1990: 118) reworking of the Bogotá data set turns an annual 4.4 per cent increase into "an annual decline in real terms of 1.4 per cent." Without going into a long technical discussion of the reasons why, my feeling is that few of the figures on trends in land prices are really to be trusted.

Do rising land prices matter?

Mohan and Villamizar (1982: 248) argue that a rise in land values only matters if it "widens the already high levels of inequality that exist in many poor countries." If the poor buy land and benefit from rising land values, then is there any reason to worry? If the poor sell land to the rich, won't incomes have been redistributed? Even if the poor buy from the rich, might they not benefit from later price increases?

Unfortunately, although Mohan and Villamizar's point is important, it is less than clear that the working of the land market in Latin America's cities is helping to redistribute income. Much agricultural land is owned by affluent families, so the sale of that land worsens the distribution of income. Even where agricultural land is owned by the poor, it is uncertain whether they ever receive the full market value.

And, if they buy plots which subsequently rise in value, it is uncertain whether they will be able to capitalize on the increase. Evidence from several cities is beginning to suggest that it is very difficult to sell plots of land once they have consolidated houses on them (Gilbert, 1993). Land is normally sold only when it contains little more than a shack (Gilbert and Ward, 1985); it is difficult to sell a proper house because banks are reluctant to offer mortgages on property in low-income settlements and sometimes there is no legal title. Better-off families prefer to buy empty plots on which to build houses to their own design. As such, it is difficult for a poor owner to reap the benefits of any rise in land values.⁶

But, even if the poor benefit from rising land values, this hardly helps those trying to buy a plot for the first time. It is the relationship between land prices and wages that is the key to housing affordability. The problem is demonstrated by evidence from São Paulo, where Kowarick and Campanário (1988: 39) report that the cost of land rose 3.6 times as quickly as the minimum salary between 1959 and 1986. New households without property were increasingly frozen out of the formal land market.⁷

New entrants to the housing market also suffer in so far as plot sizes tend to decline when land costs rise faster than incomes. In Bogotá, plot sizes fell quite dramatically during the 1970s and 1980s both for formal and informal construction sites. Between 1973 and 1975 formal construction sites averaged 155 square metres; ten years later the average had fallen to 73 (Molina et al., 1993: 59).⁸ A similar trend was apparent for Bogotá for informal-sector housing plots, which fell from 157 square metres during the 1960s to 131 square metres in the later 1970s (Gilbert and Ward, 1985: 118). By the mid 1980s, plot sizes had fallen to 75 square metres (Molina, 1990: 304). Under such circumstances, population densities are almost bound to rise as families economize on their use of land.

The increasing price of land, therefore, is clearly a major problem in a city such as Bogotá and is even more of a problem in cities like Santiago, where a poor family does not have the same option of buying land without a full range of services. In certain Mexican cities, however, poor-quality peripheral land is not particularly expensive; in the middle and late 1980s a plot of land cost between two months' and five months' earnings at the minimum salary (Colomb and Sanchez, 1991; Gilbert and Varley, 1991). The land may be of poor quality, it may be distant from the main centres of employment, it may be lacking services, but it is cheap. In Caracas or Lima, where the poor generally obtain land through invasion, plots are virtually free.

The key point to recognize is that there is a great deal of variation between Latin American cities in the way that the poor acquire land. These different methods have a pronounced impact on the affordability of land in each city (Gilbert and Varley, 1991). What we need to know is not what is happening to some mythical average land price but what is happening to the cost of plots on the periphery relative to incomes. Unfortunately, it is just this kind of data that is rarely available. Until we have such a data set, we will be unable to judge whether the cost of low-income plots of land is increasing or decreasing over time relative to what the ordinary family earns.