Is Farm Real Estate The Next Bubble?
Brett C. Olsen
Jeffrey R. Stokes
Published online: 28 May 2014
Springer Science+Business Media New York 2014
Abstract The recent increase in farmland prices leads many to conjecture that a price
bubble exists. A dataset of Iowa farmland prices for three grades of quality over the last
60 years is examined to address the question whether the conditions for a rational
expectations bubble are evident. An abnormal component in the change in farmland
prices is found during the most recent sub-period of the sample. A novel valuation
model that measures the speculative component of farmland value as a function of cash
rents shows no speculative component is present. An additional test of the time series
characteristics of the data provides no evidence of negative duration dependence.
However, analysis of transition probabilities shows asymmetry exists most notably in
the low quality farmland data series. Finally, time irreversibility is shown to be present
at different lags for only the lowest farmland quality grade. Overall, the results imply
that the low quality grade farmland is the most likely candidate to exhibit the conditions
necessary to support a rational expectations bubble. In general, however, the data offer
weak support of a bubble in farmland prices.
The sharp increase in farmland prices over the last few years has led many to believe
there may be a bubble forming in farmland markets. This belief naturally leads to the
prediction that the bubble will burst. Indeed, the recent price increase, in nominal terms,
is distinctively more pronounced than the price increase that occurred in the 1970s,
which was then followed by the farmland crash in the early to mid-80s. While a cursory
look at farmland prices may support the presence of a farmland price bubble, the
determinants of farmland value have also dramatically changed over the past few
decades. As shown in Fig. 1, while farmland prices have increased (Panel A), produc-
tivity has nearly doubled (Panel B), and crop prices have risen sharply as well (Panel C).
The coincident recent rise in farmland prices and corn prices is difficult to ignore.
J Real Estate Finan Econ (2015) 50:355–376
B. C. Olsen (*)
J. R. Stokes
Department of Finance, University of Northern Iowa, Cedar Falls, IA 50614-0124, USA