The intrinsic value of land
3 min read
One of the many myths that investors come across is that land has “intrinsic” value, which means that land must always be worth something.
Let me explain why this concept is flawed…
The notion that land has intrinsic value no matter where it is located is rooted deep in our past, beginning when we ceased being hunter-gatherers and settled into farming communities.
The control of land enabled us to house, feed and raise families in peace.
This concept has developed over time into the belief that land has value.
Does land always have value?
Land ownership has always been synonymous with security, which explains why property is fundamentally different to other forms of investment.
While you can buy shares, savings, bonds or commodities without any guarantee of a return, everyone needs a place to live and every home requires land, so wherever there are people, property has some value.
This does not mean that all land has value because if no one wants to live in a location, its land is worthless.
Australia is littered with abandoned towns – from Wittenoom in the north-west to Luina in the south-east, where the streets are overgrown with weeds and the land is free.
Does land appreciate in value, while houses depreciate?
A common and related misconception is that the value of land appreciates, while the value of dwellings built on the land depreciates.
The reality is that we can’t separate land from the dwellings, because when we buy a property, we purchase the land together with everything that is on it, such as dwellings, garages, sheds, pools and fences.
These are commonly known as “improvements” and they always form part of the title to a property.
Rather than losing value, properties usually go up in value over time, and when we claim depreciation on the improvements we are taking advantage of an accounting device to claim a tax deduction.
You only need to look at your insurance policy to see that the replacement value of your house increases over time, and does not lose its value.
Is high land-to-house value important?
Another land-related myth is that we should look for a high land-to-house value.
This seems logical but bears no relation to the actual need for land.
Homeowners form many different types of households, which determine their need or desire for land.
Couples with young children will prefer a property with a high land-to-house ratio because they want big yards to provide safe play areas for their children.
A professional couple with no children, however, may see land as a nuisance and value the house alone for its work and entertainment areas.
A retiree couple will look for easy access, low maintenance and high-security property and might not want any land at all because it requires constant maintenance.
Rather than buying a house with large land areas, they may even prefer a townhouse, villa or duplex with just a small courtyard.
Not only does land not always have intrinsic value, but many buyers may prefer a property with little land.
