Asset Bubbles, Inflation, and Agricultural Land Values

Abstract

This article discusses asset bubbles, the Kansas and Illinois land markets, estimates land values, and develops a land price/earnings ratio. Current land sales data are also examined. Finally, we examine relationships between land values and interest rates, inflation rates, and cash rents. Results show that real land values increase substantially when inflation increases. Recent land values are explored for both Kansas and Illinois with somewhat differing results. Development of land price bubbles could be enhanced if inflation becomes more widespread and land values are viewed as having good protection from inflation. Market fundamentals would suggest that an increase in land prices due to inflation occurs because of an increase in cash rental rates and not through a dramatic change in the price earnings ratio.