Some Evidence from Japan on the Efficiency of Land Markets

When an investor enters the real-estate market, can he detect a profitable parcel of land simply by observing how its price (or, more realistically, prices of like parcels in its general vicinity) has behaved in the immediate past? For example, if we observe land prices in a certain area of a city or even of a country to be rising at a rapid rate, is it reasonable to expect prices there to continue to rise at this rapid rate? If so, the market is said to be ‘inefficient’. Current prices in that market do not fully capitalize expected future price changes.

This paper asks if the Tokyo land market is inefficient and concludes that it is. If the government data on this market can be trusted, there are wide divergences in mean rates of appreciation across parcels that cannot be explained by differences in risk and that are not being closed through arbitrage. It appears that an investor in land can make an above average return on his funds by discovering where land prices have been rising at an above average rate and by investing in land in this area. If sustained by similar analyses of other land markets, this finding will give quantitative content to land economists' intuition that land markets are different from other speculative markets (for example, the stock and commodities markets), which are well known to be highly efficient.