IDEAS home Printed from https://ideas.repec.org/a/eee/lauspo/v83y2019icp75-83.html
   My bibliography  Save this article

Will land development time restriction reduce land price? The perspective of American call options

Author

Listed:
  • Wang, Han
  • Wu, Xingyi
  • Wu, Di
  • Nie, Xin

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.11China's “Disposal Measures for Idle Land” was adopted in 1999 and was revised and implemented on July 1, 2012. The second clause defines “vacant land” and stipulates the disposal method for vacant land in Article 14: Land idleness fees shall be paid at 20% of the land transfer or allocation price if the project has not been started for one year. The idle land fee shall not be included in the production cost. If the project has not been started in two years, the municipal and county land and resources authorities shall recover the right to use the state-owned construction land without compensation. Source: Ministry of Land and Resources of the People's Republic of China www.mlr.gov.cn/zwgk/zytz/201206/t20120607_1107632.htm. 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.

Suggested Citation

  • Wang, Han & Wu, Xingyi & Wu, Di & Nie, Xin, 2019. "Will land development time restriction reduce land price? The perspective of American call options," Land Use Policy, Elsevier, vol. 83(C), pages 75-83.
    • Handle: RePEc:eee:lauspo:v:83:y:2019:i:c:p:75-83
    DOI: 10.1016/j.landusepol.2019.01.028
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264837718317988
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.landusepol.2019.01.028?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
    2. Christopher R. Cunningham, 2007. "Growth Controls, Real Options, and Land Development," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 343-358, May.
    3. Nagarajan, Thirukumaran & Malipeddi, Koteswararao, 2009. "Effects of market sentiment in index option pricing: a study of CNX NIFTY index option," MPRA Paper 17943, University Library of Munich, Germany.
    4. Dulat Tubetov & Syster Christin Maart-Noelck & Oliver Musshoff, 2014. "Real options or net present value?," Agricultural Finance Review, Emerald Group Publishing, vol. 73(3), pages 426-457, January.
    5. Steven Ott & W. Hughen & Dustin Read, 2012. "Optimal Phasing and Inventory Decisions for Large-Scale Residential Development Projects," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 888-918, November.
    6. Eddie Chi-man Hui & Xian Zheng & Hui Wang, 2013. "Investor sentiment and risk appetite of real estate security market," Applied Economics, Taylor & Francis Journals, vol. 45(19), pages 2801-2807, July.
    7. Cauley, Stephen Day & Pavlov, Andrey D, 2002. "Rational Delays: The Case of Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 143-165, Jan.-Marc.
    8. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.
    9. Du, Jinfeng & Peiser, Richard B., 2014. "Land supply, pricing and local governments' land hoarding in China," Regional Science and Urban Economics, Elsevier, vol. 48(C), pages 180-189.
    10. Plantinga, Andrew J. & Lubowski, Ruben N. & Stavins, Robert N., 2002. "The effects of potential land development on agricultural land prices," Journal of Urban Economics, Elsevier, vol. 52(3), pages 561-581, November.
    11. Gu, Hui & Liang, Jin-Rong & Zhang, Yun-Xiu, 2012. "Time-changed geometric fractional Brownian motion and option pricing with transaction costs," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(15), pages 3971-3977.
    12. Ko Wang & Yuqing Zhou, 2006. "Equilibrium Real Options Exercise Strategies with Multiple Players: The Case of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(1), pages 1-49, March.
    13. Titman, Sheridan & Warga, Arthur, 1989. "Stock Returns as Predictors of Interest Rates and Inflation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(1), pages 47-58, March.
    14. Towe, Charles A. & Nickerson, Cynthia J. & Bockstael, Nancy E., 2005. "An Empirical Examination of Real Options and the Timing of Land Conversions," 2005 Annual meeting, July 24-27, Providence, RI 19125, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    15. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-514, June.
    16. Robert Brooks & Don M. Chance & Brandon Cline, 2012. "Private Information and the Exercise of Executive Stock Options," Financial Management, Financial Management Association International, vol. 41(3), pages 733-764, September.
    17. Bing Han, 2008. "Investor Sentiment and Option Prices," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 387-414, January.
    18. Cunningham, Christopher R., 2006. "House price uncertainty, timing of development, and vacant land prices: Evidence for real options in Seattle," Journal of Urban Economics, Elsevier, vol. 59(1), pages 1-31, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tsai, I-Chun & Wang, Wen-Kai, 2022. "The value of land redevelopment in different types of properties: Considering the effect of hold-out problems on the development probability," Land Use Policy, Elsevier, vol. 119(C).
    2. Song, Malin & Xie, Qianjiao & Chen, Jiandong, 2022. "Effects of government competition on land prices under opening up conditions: A case study of the Huaihe River ecological economic belt," Land Use Policy, Elsevier, vol. 113(C).
    3. Zhiheng Yang & Chenxi Li & Yongheng Fang, 2020. "Driving Factors of the Industrial Land Transfer Price Based on a Geographically Weighted Regression Model: Evidence from a Rural Land System Reform Pilot in China," Land, MDPI, vol. 9(1), pages 1-21, January.
    4. Li, L. & Bao, Helen X.H. & Robinson, Guy M., 2020. "The return of state control and its impact on land market efficiency in urban China," Land Use Policy, Elsevier, vol. 99(C).
    5. Lönnroth, Tea & Krigsholm, Pauliina & Falkenbach, Heidi & Oikarinen, Elias, 2024. "Advancing understanding of the linkages between local land policy interventions and the responsiveness of housing supply: Intervention mechanisms in the Finnish context," Land Use Policy, Elsevier, vol. 141(C).
    6. Huanchao Guo & Shi He & Haitao Jing & Geding Yan & Hui Li, 2023. "Evaluation of the Impacts of Change in Land Use/Cover on Carbon Storage in Multiple Scenarios in the Taihang Mountains, China," Sustainability, MDPI, vol. 15(19), pages 1-17, September.
    7. Mingyu Zhang & Qiuxiao Chen & Kewei Zhang & Dongye Yang, 2021. "Will Rural Collective-Owned Commercial Construction Land Marketization Impact Local Governments’ Interest Distribution? Evidence from Mainland China," Land, MDPI, vol. 10(2), pages 1-20, February.
    8. Guo, Jingpeng & Zhao, Yinghui & Li, Frank Yonghong & Mao, Kebiao & He, Jinfeng & He, Qiang, 2024. "Developing a land development compensation model for returned land in tract expropriation: Towards a unified urban-rural land market in China," Land Use Policy, Elsevier, vol. 139(C).
    9. Liu, Yue & Tian, Lixin & Sun, Huaping & Zhang, Xiling & Kong, Chuimin, 2022. "Option pricing of carbon asset and its application in digital decision-making of carbon asset," Applied Energy, Elsevier, vol. 310(C).
    10. Krajewska, Małgorzata & Szopińska, Kinga & Siemińska, Ewa, 2021. "Value of land properties in the context of planning conditions risk on the example of the suburban zone of a Polish city," Land Use Policy, Elsevier, vol. 109(C).
    11. Wang, Qian & Wang, Yanan & Chen, Wei & Zhou, Xue & Zhao, Minjuan & Zhang, Bangbang, 2020. "Do land price variation and environmental regulation improve chemical industrial agglomeration? A regional analysis in China," Land Use Policy, Elsevier, vol. 94(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kyungwon Kim & Jae Wook Song, 2020. "Detecting Possible Reduction of the Housing Bubble in Korea for Different Residential Types and Regions," Sustainability, MDPI, vol. 12(3), pages 1-31, February.
    2. L. Li & Helen X. H. Bao & K. W. Chau, 2023. "On the Strategic Timing of Sales by Real Estate Developers: To Wait or To Presell?," The Journal of Real Estate Finance and Economics, Springer, vol. 66(1), pages 169-196, January.
    3. Clapp, John M. & Bardos, Katsiaryna Salavei & Wong, S.K., 2012. "Empirical estimation of the option premium for residential redevelopment," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 240-256.
    4. Gang‐Zhi Fan & Ming Pu & Tien Foo Sing & Xiaoyu Zhang, 2022. "Risk aversion and urban land development options," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 767-788, September.
    5. Steven Ott & W. Hughen & Dustin Read, 2012. "Optimal Phasing and Inventory Decisions for Large-Scale Residential Development Projects," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 888-918, November.
    6. John Clapp & Piet Eichholtz & Thies Lindenthal, 2012. "Real Option Value over a Housing Market Cycle: West Berlin," ERSA conference papers ersa12p264, European Regional Science Association.
    7. Luca Di Corato, 2018. "Rural land development under hyperbolic discounting: a real option approach," Letters in Spatial and Resource Sciences, Springer, vol. 11(2), pages 167-182, July.
    8. Kyungwon Kim & Jae Wook Song, 2018. "Managing Bubbles in the Korean Real Estate Market: A Real Options Framework," Sustainability, MDPI, vol. 10(8), pages 1-25, August.
    9. Lu, Chien-Lin & Liao, Wen-Chi & Peng, Chien-Wen, 2020. "Developers’ perspectives on timing to build: Evidence from microdata of land acquisition and development," Journal of Housing Economics, Elsevier, vol. 49(C).
    10. Robert Grovenstein & James Kau & Henry Munneke, 2011. "Development Value: A Real Options Approach Using Empirical Data," The Journal of Real Estate Finance and Economics, Springer, vol. 43(3), pages 321-335, October.
    11. Kwabena Mintah, 2018. "Real Options Analysis in Residential Property Development Decision-Making in Australia: Perspective of Executives," International Real Estate Review, Global Social Science Institute, vol. 21(4), pages 473-520.
    12. Desen Lin, 2024. "From vacancy to verdancy? The impact of land options on the timing of vacant lot investment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 52(5), pages 1263-1307, September.
    13. W. Hughen & Dustin Read, 2014. "Inclusionary Housing Policies, Stigma Effects and Strategic Production Decisions," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 589-610, May.
    14. Tirthatanmoy Das & Kabir Dasgupta, 2018. "Evaluating the Impact of Mothers' Self-esteem on Early Childhood Home Environment: Evidence from NLSY," Working Papers 2018-03 JEL Classificatio, Auckland University of Technology, Department of Economics, revised Oct 2019.
    15. Ming-Cheng WU & I-Cheng LIN & Yi-Ting HUANG & Chang-Rong, 2015. "Forecasting Prices Of Presale Houses: A Real Option Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 143-158, March.
    16. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
    17. Wrenn, Douglas H. & Irwin, Elena G., 2015. "Time is money: An empirical examination of the effects of regulatory delay on residential subdivision development," Regional Science and Urban Economics, Elsevier, vol. 51(C), pages 25-36.
    18. Guillaume POUYANNE, 2008. "Economics of discontinuous urban development (In French)," Cahiers du GREThA (2007-2019) 2008-07, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    19. Andrianos Tsekrekos & George Kanoutos, 2013. "Real Options Premia Implied from Recent Transactions in the Greek Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 152-168, July.
    20. Carozzi, Felipe, 2020. "The role of demand in land re-development," Journal of Urban Economics, Elsevier, vol. 117(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:lauspo:v:83:y:2019:i:c:p:75-83. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joice Jiang (email available below). General contact details of provider: https://www.journals.elsevier.com/land-use-policy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.