We investigate the role that climate plays in determining rural land values. We estimate a Ricardian model using a national meshblock level cross section of land values. A Ricardian model stipulates that the value of land is equal to the present value of expected future rents from land ownership.
We use a framework that separates rents from land ownership into three categories:
rents from agricultural production,
amenity or lifestyle rents, and
We control for three different option values:
the option to install irrigation,
the option to change land use to a more intensive agricultural land use, and
the option for urban conversion.
We also attempt to separate the productive and amenity effects of climate. Consistent with previous Ricardian studies, we find that the land values increase with temperature up to a point, beyond which warmer areas have lower land values. The relationship between land values and rainfall follows a similar pattern. We find that irrigation is valuable in MBs that are particularly dry, although there is no significant option value for irrigation. Land values carry an intensification option, where land that can used more intensively than it is currently is worth more. There is also evidence consistent with both amenity and urban conversion option values, although we are unable to separately identify the two effects.
We provide tentative evidence that we are able to separate the productive effects of climate from the amenity effects. We find that the productive relationship between rainfall and land values has an inverted U-shape, while the amenity effect is negative.