Sidebilder
PDF
ePub

CHAPTER III

SOME PRACTICAL APPLICATIONS OF
ECONOMICS TO REAL ESTATE

1

BY CHARLES G. EDWARDS 1

Capital Value of Land.

There are as many methods of determining the capital value of land as there are different kinds of land. The value of urban land is decided by methods entirely different from those employed in determining the value of rural land, whether strictly agricultural, forest, or mineral land. It is a general practice, in ascertaining the value of land in an urban community, to determine what improvements will be made on such land as is vacant. Upon this estimated net income, the capital value can then be predicated. There will be, in addition to this value, the capital value arising from the character of the neighborhood and the possibility of future improvements or depreciation, such as is determined by the present and prospective transportation facilities and the present pedestrian and vehicular traffic, the improvements in the vicinity, and the relationship of the particular piece of property to the surrounding properties.

To estimate the capital value of agricultural land, its productivity and other considerations must be taken into account-climatic conditions, annual rainfall, nearness to lines of transportation and to a market for the products of the land. There should also be considered, if the land be near a city or other community, the prospects of the future growth of the city toward the land in question. If the land be used for farming purposes, the facilities for obtaining labor are extremely important elements.

1 President Charles G. Edwards Company; Real Estate Board of New York; National Association Real Estate Boards.

In determining the value of forest land, the same methods are observed, considering the transportation facilities and the labor market, together with the character and number of the trees on the land, and whether the forest is original, second, or third growth. These factors are of the greatest importance.

In determining the value of mineral land, the transportation question, labor question, expert analysis of the minerals found, and the cost of finding are the important factors. In all land lying on navigable streams, the riparian rights are valuable, and such value must be added to that based on other considerations.

In determining the capital value of all city lands, the character and cost of the government must always be taken into consideration. In urban communities, especially in residential sections, the character of the population of the neighborhood, local improvements, social advantages, educational facilities, etc., are always important determining factors. In determining the value of land which is to be improved, the prevailing interest rate for money and the permanency of such rate must be taken into consideration.

A piece of property located on a street leading to a ferry or to the terminus of a transportation line may bring a large return, but there should always be taken into consideration the possibility of the discontinuance of the ferry or the change in location of the terminus. This is also true of property depending upon riparian rights. The change from water to railroad transportation has greatly lowered real estate values during the past fifty years in all communities located on navigable streams. The building of tunnels or bridges and the discontinuance of ferries have likewise lowered the values. of property on streets leading to such ferries. The building of rapid-transit routes from the central part of a city to the surrounding communities always lowers the value of land in residential sections in the main community, while increasing values in the outlying sections. At the same time such rapidtransit routes increase the value of land on business streets in the central community.

The economic value of improvements is extremely important in determining the value of land, especially in rural

communities. It is said that Manhattan Island was purchased by Director Kieft for articles of the value of $24, and that today the land has a value of five billion dollars, but it must be remembered that over fourteen billion dollars have been spent in improvements, of every kind and character, to make New York what it is today. There must be streets, sewers, running water, gas, electricity, and means of transportation, to create values in any urban community.

The lowest value of any 25 by 100-foot lot is approximately $300 in an urban community. At least $700 must be spent for improvements to make living on such a lot desirable, and many more thousands of dollars per lot must be spent to make such a community a prosperous business center.

Farm land, to be of value, must be cleared, irrigated, if necessary, and cultivated. Mineral land must be developed, and forest lands are of no value without the employment of labor.

Law of Supply and Demand.-Rental values, like all other values, are determined by the law of supply and demand. If there is only one store, and three people want it, the rent will be higher than if there were no competition. The basis for rental value is, of course, the necessity for sufficient income to enable the owner to maintain and operate the property, and, in addition, to receive a reasonable return on his investment. A Federal court has recently fixed 8 per cent of the value of the land and improvements of apartment-house property in the year 1920 as a reasonable return to an owner. It is a matter of record that the average net return on improved urban property does not exceed 52 per cent, and the average net return on rural property is approximately the same.

During the great steel and coal strike a number of years ago, the city of Birmingham, Alabama, then, as now, a city of considerable importance, had block after block of fine residential property entirely deserted, there being no demand for this property. The property, therefore, had no rental value, no matter how great the cost of maintenance and operation. This was also true of many business blocks. There are deserted villages in the United States where no rents are possible, because there is no demand.

Commodity Prices.-Commodity prices have, of course, some effect on rents, because they enable those who produce and sell commodities to pay higher rents, and yet, during the recent rise in the prices of all commodities, rents had the least increase. While commodities were averaging a 200 per cent rise, the average rise in rents obtained in urban communities was only about 30 per cent throughout the entire country. In many communities, because of the fact that no new houses were built during the war, there was a great shortage, which resulted in a demand so large that rents were considerably increased. Comparatively few houses for the poor or middleclass people have been built during the past five years because of the high cost of labor and material.

Unearned Increment-Decrement?—The so-called unearned increment can, as a rule, be accounted for in property which has been withheld from use for any period of time, by the cost of improvement, either local or general, in the community where the property is located, and those other carrying charges which make up the entire cost of the property during that time. All that comes out of land has usually been put into it. Occasionally a recent purchaser gets a large increase through development of the location or improvements determined upon immediately after the purchase. The improvements which make increased values in real estate result from the employment of capital and from the initiative and energy of men with brains and capital. In other words, it is not the population in mass that makes values-sometimes such population in mass decreases values-but it is the leaven of able men in every community, whose foresight, courage, and ability are combined with the employment of capital and of labor, which produces increased values.

These men make improvements and extend transportation lines, and spend their money putting in sewers, building sidewalks, paving streets, installing gas and electric lights, etc. Therefore values in central localities decrease or shift with the opening of suburban property or of property in outlying districts, due not entirely to population increase but rather to the energy and capital of the men who bring it about.

Economic Effects of Real Estate Ownership. It has been truly said that he who owns the land owns the people who live on the land. This is shown by the control exercised in Europe for centuries by the land owners. There is no doubt that the permanency of the Republics of Switzerland, France, and the United States has been largely due to the fact that a majority of the heads of families in these countries have owned their homes. It is a sign of decadence when farmers living in rural communities flock to the city and when the home owner begins to pay rent.

« ForrigeFortsett »