Do properties with more land go up in value faster?

Property investment circles commonly agree land is the big ticket.

“A garden-starved townhouse is never going to appreciate in capital growth as fast as a standalone property with a freshly mown lawn” – some property investors think. In other words, “The money is in the land, and that’s that.”

Ergo: More land = faster capital growth.

And why would we question this? We all know land is scarce, which means the value of land increases and, as a happy consequence, so does the value of the house on it.

But is this true? Do properties with more land increase in value faster? And should investors focus their efforts away from properties with less land – like townhouses – and aspire more to the Kiwi dream set-up: a house and a quarter-acre section?

This article argues: Well, no.

Opes Partner’s data-crunching found no statistically significant data to support the idea that more land amassed within a specific title equates to an overall faster value increase.

Is there value in land? Of course there is, but this article argues traditional thinking in the myth of more land = more capital growth is false.

If you have any questions or thoughts, please leave them in the comments section below.

The myth of land value explained

The “myth of land” appears to make reasonable sense at first glance.

Even writer Mark Twain weighed in with his well-known saying: “Buy land, they’re not making it anymore.”

Traditional thinking states property value increase rates are tied up with the rise in land value. So you can’t be blamed for thinking houses should increase in value faster than townhouses, and townhouses faster than apartments.

So, if this is the case, should we all be investing in land, and leave townhouses for owner-occupiers?

What did the data reveal?

Opes set out to find the truth: “Does more land within one property (one title) equate to a faster overall increase in the value of that property?”

So, we searched for visible statistical significance on properties sold and the capital growth of those properties over 20 years.

The data can be difficult to wrangle. Data providers don’t have the numbers there for you to download straight away, so we had to run some experiments.

We compared the change in the average sale price of properties within a land range. This meant comparing the sale price of a property with 100-200m2 worth of land today versus 20 years ago.

Then we ran the numbers 12 times (e.g. Jan 2000 vs Jan 2020, Feb 2000 vs Feb 2020) to make sure the numbers weren’t swayed by one-off factors (more detail on how we crunched the data below).

So what did we discover? Across the entire 12 experiments, which drilled into land values region by region, we found almost no factual evidence to support the claim.

Our data showed the only properties to consistently gain less capital growth were those with fewer than 100 square metres of land. In this case, those properties as a whole received about 16% less capital growth per year on average.

But, for properties sized between 100 and 1000sqm, there was no statistically significant difference in annual capital growth rates.

In other words, a property with 150sqm worth of land increased at the same rate as a 900sqm section, all other factors held constant.

Regardless of how we interrogated the data through these experiments, the end result was often the same.

How should this change my strategy and should I only buy properties with more than 100m2 of land?

So, what does this mean for our townhouse? It means that, generally, townhouses will appreciate in value at the same speed as a standalone property.

Now, you may be wondering whether the data suggests you should only purchase townhouses (or any properties) with more than 100m2 worth of land.

One of the challenges with the above data is it considered all properties with these land bands (e.g. 0-100m2, 100-200m2).

The challenge with that is we know apartments tend to achieve less capital growth than other types of properties. So, within the data, we are lumping together a 90m2 townhouse with a 20m2 apartment.

So we need to separate these out to make sure we’re making investment decisions based on accurate data.

When we re-ran the numbers looking at 50-100m2 townhouses vs townhouses and standalone houses with more land, we again found a statistically significant difference between the capital growth of townhouses with smaller plots of land vs townhouses and houses with more land.

What else did the data tell us?

Land prices differ across New Zealand (this is probably obvious)

When we looked at the land values per size across the entire country, we realised we were more likely to have a 900 square-metre section in the smaller regions where land is cheaper.

So, we rejigged the data solely focused on Auckland to see if that would make a difference to land size and capital growth. It didn’t.

The results were the same: No statistical difference bar the less than 100sqm grouping.

Larger land sections in cities can be cheaper

In Auckland, the average sale price of a 500 to 600 square-metre section was $1.4 million in May 2021.

But the average sale price for a piece of land 800 to 900sqm in the same month was $1.2 million.

So how does it make sense that a much larger section is so much cheaper?

Again, it comes down to geography. Like the small towns we mentioned above, you’ll find these bigger “city” sections around the city’s fringes.

So, in Auckland you’ll find auctions in the Rodney and Franklin areas feature larger sections because they are further away from the central city where the land tends to be cheaper.

A higher-priced area would have a smaller section for a higher price, you can almost guarantee it. So the key takeaway is you should consider multiple factors when investing.

It may make more sense (and you may get more capital growth) if you purchase a smaller section close to the central city, compared with a larger section on the outskirts.

How did we get this data?

To get to the very bottom of this conundrum, we dredged through miles of REINZ (Real Estate Institute of New Zealand) sales data, and steered them through a series of 12 experiments.

First, we segmented out the median sales price based on section size, and grouped it into 100m2 increments.

So: 0 to 100m2, 100 to 200m2 ... up to 900 to 1000m2.

Then we spread the sections over a series of months, looking at 20 years’ worth of capital growth 12 different ways (for example May 2000 vs May 2020, June 2000 vs June 2020), and investigated region by region.

In the interests of full disclosure, there are some limitations with the data set. And the analysis is not PHD-perfect.

First and foremost, we were only able to get sales data as opposed to an average value.

In a perfect world we’d be able to get a dataset of every house in the country and look at their value 20 years ago, and then compare it with today’s value.

That’s not possible for several reasons – not only is the data not available, but also properties change over time. A property sized 1000m2 10 years ago may be 5 townhouses today.

Only looking at the sales data also means you're looking at a different set of properties sold each month. So the properties sold in May 2000 are different from the properties sold in May 2020.

However, there is a benefit in that these are actual “real-life” sales. So the data is based on what the market really thinks a property is worth, rather than an algorithm.

To be truly transparent, there are ways we could improve the analysis:

• We could have excluded newly-built properties.
• Or we could look at the average value rather than just sale prices.
• Or we could have conducted more experiments with the data.

That’s not to say this analysis has no value. But with unlimited time and money we could make it better. And it’s important to recognise any report’s limitations.

Are you saying land has no value?????

Of course we aren’t saying land has no value. Land is extremely valuable and does increase in value over time - as does the value of the building on it.

And investors may opt to purchase properties with more land even though, statistically, we haven’t seen them deliver more capital growth.

For example, one of the investors we work with was looking at buying property in a Mangere Bridge development. They had the option to pay an extra $40,000 for a corner section with a bigger site (extra 30ish m2).

In the end they thought this was a worthwhile investment. The extra dollars ensuring a point of difference.

This may make it easier to sell when the time comes, or easier to get tenants when multiple properties in the project are up for rent at the same time.

But don’t more expensive properties get more capital growth?

It’s all relative. Any dwelling with a larger section will be more expensive. So you’ll get more capital growth in dollar terms, but not necessarily in percentage terms.

Think about it: If a $1,000,000 property gets a 10% return on capital growth, that’s $100,000.

But the same 10% return on a $600,000 property is going to be 60K.

So, yes, you get more money in absolute dollar terms, but it is the same in percentage terms.

That’s important to consider because if you purchase a more expensive property you will have put more money in initially.

What we are trying to say is: Don’t let the dollar amounts muddy the fact that land value doesn’t increase at a faster rate just because you have amassed more of it under one title.

Of course, there are exceptions to this where the value of land can see unnaturally high increases in value.

For example, when you have a change in zoning, such as the Auckland Unitary Plan, and all of a sudden subdividing is easier.

In this instance, you could be the person who sells land to a developer for a slight premium. But that’s a case-by-case exception rather than a market-wide trend.

However, these premium sales weren’t visually apparent in our data interrogation, which goes to show how common they are (not very).

The point we are trying to make is: The amount of land doesn’t magically make the value increase any faster.

Our final thoughts on the matter

No matter how we worded our data sets, or how many experimental cycles we rinsed the data sets through, the results were very much the same.

So our conclusion is: Other than sections with less than 50m2 of land, there’s no statistical difference in capital gain rates between smaller and larger sections.

Put another way, looking broadly at the whole market, other than the extremely small sections, a 200 square-metre section is going to appreciate at roughly the same rate as a 1000 square-metre section.

This means that townhouses are no worse off, capital growth-wise, than standalone houses on average.

Yes, there are variables to this. Maybe you got a premium for your quarter-acre section, maybe you live in the wop-wops, or maybe on the fringes of the city you are lucky enough to enjoy a cheaper, bigger section.

But for investors our results suggest it is a good idea to consider looking into the other factors when deciding what to buy with what sized section.

It could be all of this data-drilling doesn’t matter all that much to you because you’re buying a 500sqm property in a better area or you’re looking to invest in a smaller land size for a much better yield.

Yes, there is money in the land, but having more of it doesn’t mean it will increase in value any faster.

A metre square of land is a metre square of land.

So, invest in that garden-less townhouse. You’ll be fine.