Will land development time restriction reduce land price? The perspective of American call options. (April 2019)

• Record Type: Journal Article
• Authors: Wang, Han; Wu, Xingyi; Wu, Di; Nie, Xin
• Is Part Of: Land use policy. Volume 83(2019)
• Page Start: 75
• Page End: 83
• Publication Date: 2019-04
• Subjects: Land use -- Real options -- Optimal stopping time -- Land price; Land use -- Periodicals; Land use -- Government policy -- Periodicals; Sol, Utilisation du -- Périodiques; Sol, Utilisation du -- Politique gouvernementale -- Périodiques; Electronic journals; 333.7305
• DOI: 10.1016/j.landusepol.2019.01.028
• Languages: English
• ISSNs: 0264-8377

Abstract

Highlights: We combined the theory of option, martingale and optimal stopping time to calculate the optimal stopping time of land development, and test whether time limit for land development in China can effectively reduce land idleness. Optimal stopping time fluctuation of land development is large due to certain factors such as house price and land price volatility and social rates of return. The optimal stopping time for land development in some regions and periods of different levels of economic development are different. Land development time constraints sometimes reduce land prices and have a greater impact on low land prices. The government should strengthen management of development time limits in fast urbanization areas and reduce policy uncertainty to reduce "squatting" behavior. Abstract: Land speculation can increase idle or inefficient land use, thus causing a number of problems, which many countries around the world address with reasonable administrative intervention. According to China's "Disposal Measures for Idle Land", the land development time is limited to two years. If this time is exceeded, the government will restore the land use rights to the state without compensation for the developer. 1 Using the perspective of American call options, this study combines the Optimal Stopping Time and the Martingale Theory in Real Option Pricing Theory. Both land and house price data from 2010 to 2016 have been integrated for Beijing, Wuhan, and Nanning in China. Furthermore, an empirical analysis of the optimal stopping time for land development has been conducted in these three cities to study whether the imposed limit on land development time reduces land prices. The results show that the optimal stop-time fluctuation of land development is large due to factors such as house price and land price volatility as well as social rates of return. In addition, the optimal stopping time for land development differs in specific regions and periods of different levels of economic development. Limiting the land development time will sometimes lower the land price and exert a stronger impact on low-price areas. Although limiting the land development time can help certain areas to reduce idle land, the suppression of land speculation and the stabilization of land prices are not obvious. This strategy will, however, obstruct the development of real estate economy. The conclusions of this study will help the government to formulate a sound policy, control land speculation, improve land use efficiency, and reduce the occurrence of land waste.