principles of valuation of land and farms

Proceedings of Conference. 187

PRINCIPLES OF VALUATION OF LAND AND FARMS. By D. K. BRITTON.

INTRODUCTION. Valuation is a mental process. It consists in relating the worth of an

object to the worth of other objects, and it precedes all rational decision and choice. Within limits our minds are capable of weighing objects one against another according to their respective qualities and arranging them in an order of preference. The term “ valuation ” describes the process of locating the position of an object on the scale of preference, and “ value ” is the name given to that position.

It follows from this that valuation is something more than a professional occupation. We are all valuers, and if our valuations do not aIways coincide with those of men who make a living out of valuing, we are not necessarily in the wrong. The valuer, ‘with all his experience and the advantage of easier access to the relevant information, may have misread the signs of the times. In an important sense, valuation is a matter of personal judgment.

In the field of edonomic activity value most commonly finds expression in terms of money, but trading by barter also involves valuation. Where valuation is to provide the basis for a market transaction it gives rise to a price, or market value ; but in some circumstances, such as stock-taking or assessment for taxation, the money value arrived a t will not be regarded as a price, but as a more or less conventional registration to facilitate the aggregation or comparison of unlike quantities.

Strictly speaking, valuation can only be considered in relation to some person for a given purpose in an actual or postulated situation. Thus we should distinguish valuation for sale, for purchase, for mortgage, for probate, for rating, for income tax, for compulsory purchase and so on. There can be no doubt that the purpose of valuation will usually affect its results. It is a matter of common experience, for exampIe, that I ‘ properties adapted to their owners’ uses are typically worth more to them than their market value ’I1 (e.g. churches). Again, it has been pointed out that the object of valuation is ‘ I sometimes accuracy with respect to a current or a fixed future date, and sometimes safety for a person of present actual or future potential interest.”z This paper will not refer specifically to each type of contingency which the professional valuer must be prepared to meet, but it should not be supposed that we shall have in mind some kind of average, multi-purpose or “ basic ” value. Such a concept seems only to blur the issue.

In all conditions, valuation is the process and value the result-though, indeed, thanks to the perversity of language we sometimes speak of I ‘ a ”

188 Agricultural Economics Society.

valuation in the sense of any estimated money value arrived at in the absence of an actual market transaction or other conclusive evidence.

The reasons for the emergence of a special vocation of valuer (or " appraiser ") are to be found in the special nature of the market for land, houses and buildings (the " real estate market "), which in turn is attributable to the special characteristics of real estate which distinguish it from other types of commodities.

The essential features of a market are organization, communication and knowledge. " A market is ' perfect ' or ' ideal ' to the extent that the organization is complete and all persons in it are constantly and instantly in full knowledge of one another's offers and acceptances. In a perfect market, either the commodity sold is uniform or else there is complete and accurate knowledge of all differences in it. Obviously, in such a market there can be but one price for the same thing at the same time."a Marshall noted that highly organized markets deal in commodities which " can be easily described, so that they can be bought and sold by persons at a distance from one another and at a distance also from the commodities. If necessary, samples can be taken of them which are truly representative : and they can even be 'graded' . . . ; so that the purchaser may secure that what he buys will come up to a given standard, though he has never seen a sample of the goods which he is buying and perhaps would not be able himself to form an opinion on it if he did."4 The interested parties to a transaction on such a market, " even if they are not supposed to be strictly omniscient, are at least supposed to know automatically all that is relevant to their decision^."^

Measured by these standards, the real estate market is very imperfect. The prices and conditions of sale of landed property are often not made public. Markets tend to be local and communication between them is poor. Many sales are not freely and willingly embarked upon, and the seller is not always in a position to withdraw from the market in the expectation of receiving a higher price on another occasion or in another locality. The commodity bought and sold is not uniform and the elements of variation in it are not capable of complete specification and are in consequence imperfectly comprehended. Bargaining is influenced by all kinds of incal- culable non-economic motives, such as family ties, pride of possession and desire for social prestige or personal aggrandisement.

More important, perhaps, than all these is the fact that land and buildings endure, and purchase therefore carries with it command of a stream of future income whose dimensions, reliability and power to satisfy cannot be accurately foreseen. The nature and economic value of the rights of ownership will also vary according to the laws dealing with landlord-tenant relationships and according to particular obligations imposed by the prevailing type of contract. The outward appearance of the physical property is one thing, the extent of the legal property, its singleness, duality or complexity is another. Each property requires its own definition.

In the case of the great majority of goods and services the existing price system performs the function of valuation for a society as a whole. We need only consult price lists and relate them to our own preferences to arrive at economic decisions. This applies particularly to commodities which are sold in lots which are, for practical purposes, identical, such as packets of sugar, or boxes of chocolates of a particular brand. In such cases, once we have experienced one specimen of the commodity in question (or, without

Proceedings of Conference. I89

actual experience, are satisfied that the description given is complete and accurate) we can on all subsequent occasions register the price quoted in our own scheme of values, without further enquiry.

In other cases there may be an established price list refemng to specific goods or services which are in some respects unique, and our capacity for valuation is then called into play. This will happen, for instance, when we buy antiques or works of art, or commission a writer. In such cases we may sometimes decide to take the advice of a professional valuer or critic.

There are some commodities, however, which have no take-it-or-leave-it price attached to them. They may never be for sale ; they may be for sale subject to offer-'' everything has its price " ; or they may, in special and non-recurrent circumstances, be put up for auction and sold to the highest bidder. Here the price system seldom gives any ready-made indication of market value, and the process of independent ad hoe valuation is inevitable. Land falls into this category, especially land which is already incorporated in some kind of economic enterprise or social settlement, like a farm, a plantation or a town. Such land might be described'as highly " differentiated." No price schedule could possibly contain enough categories or grades to cater individually for all parcels of land, buildings and other permanent or semi- permanent forms of wealth (singly or in combination), affected as they are by location, by the chances of time and circumstance and by the individuality of their owners and users. Consequently these give rise to a problem of valuation every time a value needs to be placed. upon them, and principles of valuation have had to be worked out. In the absence of a ready-made current and generally recognized market price, a substitute has to be constructed.

THE RECENT MARKET. To illustrate in broad terms the extremely heterogeneous nature of the

commodity " farm land " as it is offered in auction markets in England and Wales a t the present time, certain figures are given in Tables I to 111. The data have been extracted from weekly reports published in the Estutcs Gazette and covering sales taking place between May, 1949, and April, 1950.

Table I ilIustrates one elementary basis of differentiation between farm lots, namely the presence or absence of the right of vacant possession among the bundle of rights which change hands when the sale is completed.

190 Agricirltural Ecmomics Society.

TABLE I.

FARMS SOLD AT AUCTION IN ENGLAND AND WALES, MAY 1949-APRIL 1950.

1. Number of farms sold 2. Acreage sold . . . . . . 3. Mean acreage per

farm (b) . . . . . . 4. Rice realised . . . . . . 5. Mean price per farm ... 6. Mean price per acre ... 7. Rent paid . . . . . . 8. Mean rent per farm ... 9. Mean rent per acre ...

10. Years' purchase (pass)

Vacant possession (4

424 38,822

92

A3,393,189 '-58,003

A87 - - -

Not vacant possession, and rent recorded

157 17,233

110

&738,829 L4,706

L43

A25.746 5164

29s. l ld.

28.7 (c)

Others mostly " part possession," or rent not

stated)

160 19,063

119

&1,276,400 D.978

L67 - - - -

Total, all farms

sold

74 1 75.118

101

L5,408,418 D.299 D2 - - - .

- i

(a) " On completion " or " early." (b) Roperties of less than 5 acres excluded. (c) Equals 3.5 per cent. pass annual return on current price.

It is clear from Table I that before any useful indication can be given of the price which farm land is fetching today a distinction must first be drawn between sales with and without vacant possession, for prices of vacant farms are about double those obtained for farms with a sitting tenant. (Table 1, line 6.)

This, of course, disposes of only the most obvious of the causes of price differences " per acre " (i.e. per acre of land with buildings and permanent equipment). Another factor will be the ratio of land to buiIdings and equip ment, as represented in the total farm price. I t is well known that this ratio is highly associated with the area of the farm. But even when the factors of possession apd farm sizes are taken into account there remains a remarkable degree of variation in prices.

Table I1 shows the distribution of 424 farms sold with vacant possession, analysed according to the size of farm and sale price per acre.

TABLE 11.

DISTRIBUTION, BY PRICE PER ACRE AND RY S I Z E , OF 424 FARMS IN ENGLAND AND WALES SOLD BY AUCTION

WITH VACANT POSSESSXON, MAY 194Q-APRIL 1950.

300 acres 50 acres 100 acres 150 acres 300 acres and over 11 . Total

Size of 5 and under 1 50 and undcr 100 and under 150 and under

Price per acre :

Under /25 ... ...

...

...

...

...

1 6 7

16 15 16 20 17 84 I 0.4

5.0 6.2

12.1 11.6 9.1

11.8 12.2 31.4 -

1 5

I8 25 23 18 9 3 4 -

Total ... I 182 I 100 I 106

per cent. No. of per cent. No. of by area farms 1 hy area farms

1.2 2 3.3 2 5.0 8 14.5 12

18.4 14 24,5 26 24.3 15 26.0 14 21.8 13 22.5 5 16.5 4 7.3 3 7.6 1 1.9 - 2.2 3.1

--

- - - - - -

100 57 100 62

I I

by area

40 69

Mean price per acre . . .

1 92 Agricultural Economics Society.

The figures in Table I1 for farms of '' 100 and under 150 acres '' illustrate the range of variation to be found in the prices of farms of roughly comparable size. Even a range as wide as L50 to LlOO per acre is sufficient to account for only just over half (50.5 per cent.) of the land comprised by farms in this group.

The figures for farms sold at L200 an acre and over bear witness to the great importance of buildings and equipment in the total value of many small farms. In many cases the attainment of these high prices per " acre " is mainly attributable to the inclusion of a vacant farmhouse in the property sold.

Table I11 shows the corresponding distribution for 157 farms sold without vacant possession.

TA

BL

E 11

1.

DIS

TR

IBU

TIO

N,

BY

PR

ICE

PER ACRE A

ND

BY

SIZ

E,

OF

157 FARMS I

N E

NG

LA

ND

A

ND

WA

LE

S SO

LD

BY

AU

CT

ION

15.3

49

.2

22.6

6.

6 3.

6

2.7 -

-

WITHOUT V

AC

AN

T P

OSS

ESS

ION

, M

AY

1949

-APR

IL 1

950.

3 18 6 4 1 -

-

-

~~

Size

of

5 an

d un

der

farm

} 1 50

acr

es

No.

of

Pric

e pe

r ac

re :

farm

s

Und

er

A25

and L25 u

nder

... 45

0 ...

...

1 L

l00

,,

,, 61

25 ..

. L50

I,

,,

L75

...

L75

,, ,,

LlO

O . .

. L1

25

,, ,, L150 .

.. Ll

SO

,,

,,

4175

_..

5 L1

75

,, ,,

L200

. ..

2 A2

00 a

nd o

ver

...

...

1

per

cent

. by

are

a

2.5

18.3

30

.8

16.8

18

.9

4 -4

6.6

1.2

u.5

50 a

nd u

nder

10

0 an

d un

der

100

acre

s 15

0 ac

res

No.

of

per

cent

. N

o. o

f fsrm

si by

area

5 17 8 2 1 1 -

-

-

-

I-

per

cent

. by a

rea

9.5

57.4

18

.4

12.0

2 *

7 -

-

-

-

I

150

and

unde

r 30

0 ac

res

300

acre

s an

d ov

er

5 19 2 2

5.6

I- I ll

2R

I 10

0

per

cent

. by a

rea

47.7

42

.7

9.6 -

-

-

-

-

-

100

Tot

al

67

l9

I ;:::

; I 0.

1

31

' 13

.9

16

i 6.

9 11

1

2.7

4 I

0.4

0.9 -

-1 lS7

I loo

,443


Here agah very considerable variation is shown, within acreage size- groups, and the quotation of average price per acre for farms of a given size would, taken by itself, often turn out to be a totally unreliable guide to the market value of any particular farm, even after the possession factor is taken into account.

What are the other factors which cause these great differences between farm sale values ? And are they associated with the reasons for the remoteness of the.farm real estate market from " perfect market " conditions ? The two aspects which I have mentioned so far-possession and size-are definite, ascertainable facts, which all interested persons could discover for themselves before the sale. But what of factors like soil type, level of fertility, farm layout, condition and convenience of buildings, and advantages or disadvantages of location ? What allowance would buyers make for these, and what price variations would remain after they had been taken into account? I t has not been possible to make an analysis of this kind from the data of Tables I to 111, as the necessary information concerning the physical features of the farms in question is not available. There was, however, a study made on these lines by G. C. Haas in Minnesota in 1922-and there have probably been others since-which showed that two-thirds* of the variation in sale price per acre between 160 farms sold in Blue Earth County from 1916 to 1919 could be explained by four factors : depreciated cost of buildings per acre ; land classification index (a weighted index based on the proportion of land of various grades) ; productivity of soil index (based on average crop yields on the farm in question) ; and the distance to the market where most of the farm's products were sold.?'

It is noticeable that only the last of the four factors listed is measurable by direct observation. Rates of depreciation, the weighting of different classes of land in a composite index, and the crop weighting and choice of years for the calculation of average crop yields-all these involve an element of personal judgment in interpreting past experience and factual data. I t is arguable, therefore, that the failure to explain a greater proportion of the total farm-to-farm variation was due to errors of judgment in giving numerical expression to each farm's characteristics. Much more likely explanations of the residual variation, however, are, first, that there are other physical factors which have an appreciable influence on sale value ; second, that purchasers, of land sometimes act irrationally or intuitively, or at least are not guided entirely by a careful estimation of a farm's geo-physical or socio-physical qualities ; and third, that judgments of the temporal quality of farm real estate-its capacity to yield income in the future-relative to the presence or absence of this quality in other forms of wealth play no small part in the final price determination.

OBSERVATION AND EXPECTATION. The remainder of this paper will be largely concerned with the treatment

of the time factor in the theory and practice of valuation, and with the relationship between past, present and future values, costs and incomes. It wil l be convenient to discuss the various procedures under the headings of retrospective methods; circumspective methods and prospective methods, according to the emphasis placed on prices paid or costs incurred in the

Ra, the coetficient of determination, -0.66. t It should not be overlooked that the area for which Haas made his analysis was " more

than usually uniform as to soils, topography, and systems of farming " (op. cit. p. 7). In a more varied agricultural region his four factors would probably have accounted for a good deal less than two-thirds of the total variation.


past, prices being paid in the present, or prices or incomes expected to be received in the future.

The retrospective approach assumes that present value can be determined by reference to former or original cost, due allowance being made for depreciation during the intervening years. The method is quite impracticable where land and the capital improvements embodied in it are concerned. Much of the original cost was incurred generations ago, and in certain conditions i t has even been held that “ i n most holdings the cost of the buildings, fences, roads, drainage, etc., even if liberally depreciafed, would equal or exceed the total Jalue of the entire farm.”O In addition, there is the awkward problem of making allowance for changes in the value of money. Reference to original cost may be helpful when dealing with an improvement made quite recently, but it has to be remembered that there is an element of obsolescence in all forms of capital, whether because the type of installation has been superseded by improved designs or because a changed system of farming affords less effective utilization. In any case, we cannot add together the several (depreciated) original costs of all the capital items incorporated in the farm. The contribution of capital to output results from the con- junction of all the capital elements. Their total value depends on their collective contribution to the farm as a going concern.

Fundamentally the objection to retrospective methods is that they rest upon the fallacious concept of “ intrinsic ” value, which has wrought so much damage and confusion throughout the history of economic thought. Value is not a quality inherent in a substance, like weight or colour. Market value depends on estimates of desirability backed up by effective purchasing power. The idea that there is any necessary connection between the present economic value of an object and the time and effort which, has gone intog its creation is erroneoys-witness the disappointed hopes of multitudes of toiling artists who never emerged from obscurity. If expenditure of resources is unrelated to needs, some economic value is permanently extinguished.

The idea of “intrinsic” value is therefore to be avoided in land valuation, if it is taken to imply that a farm or a plot of land possesses a- value which endures independently of the social context. In an agricultural economy based on production for sale or exchange, the value of an individual farming unit will depend in general on conditions in the market which it serves-and from time to time these will change-and in particular on its position in relation to centres of population, communications, etc. It may be true that any farms sharing similar social facilities and amenities and organized on a common pattern of cropping or stocking can be correctly placed on a scale of relative values entirely by reference to physical characteristics like soil and aspect, factors affecting internal economy like layout of fields and convenience of farm roads, and an inventory and detailed specification of buildings and fixed equipment ; but it will usually be found that as soon as some important element in the local or general social and economic structure changes, the impact of the change will affect some farms more than others and some re-arrangement in their relative values will result, without any perceptible or associated change in ‘ I intrinsic ” properties.

The alternative concept of ‘ I contingent ” value may be illustrated by a hypothetical instance of a change in present value without‘ any physical. change a t all. Suppose that a certain tract of marginal land is being considered by a would-be purchaser with a view to large-scale improvement. In its present condition and use it is considered to be worth LlO an acre. On the basis of calculated or anticipated costs of improvement and of the benefits


to be reaped in higher rates of return, it is estimated that an improvement scheme will handsomely repay the initial and maintenance costs. From the moment when the decision is taken to try to put the scheme in hand, the present value of that land may rise to €15 per acre ; for that is the price which the would-be purchaser may be prepared to offer in order to obtain the right to carry out his plans. Yet in all this the “ intrinsic ” properties of the land have not changed at all. It is just that some of them are thought to have been newly discovered.

By the same kind of argument, the value of a whole region of agricultural land may rise or fall according to the presence or absence of farmers who know the potentialities of that kind of land and have a rich fund of knowledge and skill which they can call upon when they undertake its cultivation. Here the value is bestowed, or released, by the users of the land, which has less economic significance i f farmed by a generation of ignorant men.

Turning now to the prospective or income-capitalization method, we reach what is probably the most important and the most controversial part of the subject. The essence of the method is usually expressed in the formula V=E where V is the present market value, a is the estimated net annud

income received by the owner, and Y (expressed as a fraction or decimal, e.g. -05) is the rate of interest considered reasonable for capital investment in this type of property. Alternatively. V = a x years’ purchase ”, again the years’ purchase being the number considered reasonable in the particular case.

The formula has a deceptive air of combining simplicity with precision, but in fact it begs a great many questions. In the first place, it appears to imply that the current rate of net annual income can be assumed to continue in perpetuity. This will not always be the most realistic assumption to make, and there is ample evidence that in some periods optimistic purchasers, if they were using this method of price determination even in a rough-and-ready manner, must have been postulating an annual rate of income considerably greater than that being currently earned at the time of the purchase. The formula is therefore sometimes interpreted as letting u stand for anticipated annual average income, if this is thought to differ from current earnings. Alternatively, it has been suggested that the adjustment for anticipated changes in the annual yield on the investment should be made in I , on the grounds that if higher incomes are anticipated the investment is safer and a lower rate of interest is therefore appropriate; while in the case of anticipated decline in income, there is risk of loss and a higher interest rate will be required, A third method, often quoted in American writings, is to modify the formula to read V = f + i where i is

an expected annual increment in annual income.* This is perhaps as unrealistic as the simple formula V=E since incomes seem no more likely

to continue to increase by arithmetic progression in perpetuity than they do to remain at their present level indefinitely. It may be remarked, too, that if i is negative and is the same percentage of u as the rate of interest is per cent., V , the present value of the property, becomes zero; while with higher values of i , V is negative and the property (which currently

y ,

r 1’’

I,

i will be negative in the case of anticipated annual decline in income. The formula is attributed to Wilfred I. King.

. Proceedings of Conference. 197

commands a positive net income) cannot be given away! In reality, deterioration of property can hardly be expected to continue to the point when net losses are being made year after year.

A further modification of the formula has been suggested in order to remedy this weakness. The revised form, V= -+ - I--- ) permits

the rather more likely assumption that income will increase or decrease by regular annual increments for a limited period of years and then become stabilized. The symbol n stands for the number of years during which an increase or decrease will occur.

These refinements, however, are of secondary importance, compared with the main problem of determining u and Y in each individual case. Consider the steps involved in estimating the expected annual net income of an owner-operated farm. It will not do simply to study the farm’s financial accounts in current and recent years, for these will be affected by any abnormal weather conditions, by the current levels of prices and costs and by the abilities and sacrifices of the present occupier. It is necessary to attempt to abstract from these conditions and envisage ‘‘ normal ” conditions and management. According to Professor Karl Brandt, “ the capitalised revenue method of appraisal . . . provides for an estimate of the possible normal yield of each field on the assumption of a certain standard rotation, a certain organization of the farm typical of the district and of average fair management. The assumed yields are multiplied by assumed average prices of the produce as received by farmers at the time of the appraisal. The result is supposed to represent the normal gross return. Finally, taxes, and interest upon the operating capital, depreciation for buildings and inventory, as well as a security reserve for unexpected hazards, are deducted and the remaining normal net income capitalised according to the prevailing normal interest rate.”O

This procedure bristles with difficulties, and mistakes can occur a t almost every stage. Such terms as I ‘ normal yield,” “ average fair management ” and ‘‘ normal interest rate ” are called by Professor Brandt “ rubber- concepts,” since they may be stretched by the valuer according to his own reading of the situation. If, in going through the successive stages of the calculation, the valuer stretches the concepts sometimes in one direction and sometimes in another, errors will partly cancel out and his final result might perhaps fall not very wide of the mark. But it is not usual for human behaviour to be random; we ali tend to be either consistently sanguine and generous or consistently cautious and niggardly in our estimations, according to natural inclination, experience and training. If the capitahation method is an attempt to get away from valuation based on the apparently capricious fluctuations of actual market quotations, it does not succeed in substituting a system which is free from subjective influences.

Used in isolation, the method is hardly more successful when applied to the case of a farm which is let and which is to be valued for investment purposes. Here a is not simply the current contract rent. The landlord’s expenses must be estimated and deducted to arrive at net rent. Sometimes a conventional percentage deduction is made, but this is crude and it is desirable to consider the particular farm on its own merits, allowing for any special repairs and replacements likely to be necessary in the near future. Furthermore, there may be a prospect of the contract rent being advanced in the future, and this will affect the calculation of anticipated annual net income.

r 7 3 ( ( l f r ) ” ’ ,


If a farm which is now let is to be valued at its ‘‘ vacant possession ” value (i.e. the present value to the tenant as purchaser), any form of capitalization of the current contract rent is likely to be totally misleading. In all cases valuation must take account of anticipations, but especially if these violently conflict with current rates of income. Current gross rents reflect a partial monopoly held by sitting tenants, created by custom and the Agricultural Holdings Acts. In a free and fluid market rents would certainly rise.

So far in discussing V = s and its modifications we have considered only

a, the part of the calculation concerned with the stream of future income to which the owner will be entitled. We now come to r, the rate at which this future income is to be discounted to amve a t its present aggregate value. The accepted principle appears to be that the investor or would-be farmer first takes into account (whether consciously or not) the current rate of interest earned by an “ ideal ” security, characterized by a high degree of safety of the capital, which can also be easily realized if necessary, and full assurance of a regular income, easily collected. A reasonable rate of return on any particular investment is then to be amved at by comparing its qualities (so far as they can be judged) with those of the “ ideal ” security or whatever existing form of investment most nearly approaches the ideal.

Even in an era of guaranteed prices and assured markets, investment risks are not equal for all types of agricultural enterprise, while it seems reasonable to suppose that under a free price system rates of return on investment show even greater diversity. Any proposal to use one conventional rate for agricultural properties cannot therefore be seriously entertained. Moreover, in considering what will be an acceptable rate of return some farmers are likely to be strongly. influenced by the value which they attach to the living conditions which the farm will provide, the independence of the way of life which occupation of the farm will permit them to follow, their particular attachment to a certain area, and so on. It matters little whether these considerations are brought into the income part of the calculation (making a equal to anticipated net annual cash income plus the purchaser’s individual and entirely subjective valuation of the non-monetary, intangible rights which he will enjoy) or into the capitalization part of the calculation (making I , the acceptable rate of return on the investment, equal to the rate which would be generally expected on an investment of comparable security of capital, liquidity, regularity of income, etc., less an amount representing a proportion which the owner is prepared to forego because of the personal experiences which he expects t o be associated with the process of earning the return on the investment and which he regards as an invisible asset). What matters is that the adjustment is made in practice and should therefore be allowed for in theory.*

The correct assessment of r is obviously crucial to the accuracy of the final valuation, V . If, for instance, a rate of 34 per cent. is used when in

r

* In practice the value attached to the intangible benefits may often be about equal to lanjflord’s outgoings f?,r management, maintenance, etc. Hence the tendency to speak of years’ purchase in relation to gross annual rental value tlthough the cask return on the investment will be less than this. In using the term it is advisable to specify whether gross or net return is under consideration.

On the treatment of intangible 0 1 “ unseen ” values, see A. W. Ashby’s contribution to the discussion on the paper read to this Society by W. C. D. Dampier- Whetham on The Economics of Rural Landowninf. Jour. ROC. A.E.S. Vol. 1, No. 3

years’ purchase

(1930), pp. 69-70.

Proceedings of Conference, 199

fact 3 per cent. would be more appropriate, the difference between the “estimated” V and the “correct” V will be over 14 per cent. of the ‘ I correct ” V . I was reminded of this recently when I found that, in giving evidence to the Committee of Public Accounts, Sir Donald Vandepeer had said that the present (1949) value of landlord’s capital in U.K. agriculture, estimated “ on the conventional basis of capitalizing the net rent a t so many years’ purchase . . . is believed to amount in the aggregate to something of the order of &l,OOO million.”’ Previously Professor M. G. Kendall estimated the value in 1937-9 to be about &900 million.1° In view of the fact that in 1949 the sale prices of farms appear to have reached a level roughly three times that of 1937-9, one can only suppose that these two calculations employed widely different rates of capitalization.

The prospective, or income-capitalization, approach to valuation has been strongly criticized because it dispenses with the empirical evidence of actual valuations which the farm real estate market, for all its imperfections, can provide. The German economist Aereboe has been prominent among those who have distrusted the capitalization method employed in vacuo and have advocated instead a systematic analysis of market prices to permit the valuation of a particular property by comparative methods.l* Dismissing “ the so-called valuation according to revenue ” as “ impracticable, un- scientific and indefensible,” Aereboe asserted that the market does tend to operate in such a way as to cause parcels of land of the same size, the same location in relation to markets and amenities and the same quality of soil, sold in the same market at the same time, to sell a t similar prices. Buildings and equipment are “ disturbing factors ” altering the basic “ topography ” of farm sale prices. He argued from these premises that if methods of observing, classifying and measuring these and other features of farm properties could be improved, farm valuation could eventually become an objective and scientific process. This approach is in fact an attempt to harness the price system so that it settles the problems of real estate valuation for us in the same way as published prices obviate the need for painstaking valuation in most of our shopping transactions.

The underlying philosophy of Aereboe’s method-which I have called the circumspective method-is that a property is ‘‘ worth ” what it will currently fetch, and not what a disinterested party thinks it ought td fetch. For valuation to be sound it must refer again and again to the market, however blundering and insensitive its reactions may sometimes appear to be. Sale prices express the majority judgment of experienced farmers and dealers in land as to potential future revenues, security, general agricultural prosperity, and so on. Aereboe’s technique, if adopted on a wide scale, would require comprehensive and detailed sale price statistics, better soil classification, the development of statistical measuring-rods for location values, buildings, etc., as factors affecting land prices, very careful study of certain selected “ standard farms ” in various regions, the pricing of these farms by reference to the sales statistics and to mathematical analyses performed on these, and ultimately the valuation of any particular farm by making a “ plus ” or “ minus ” assessment of each of its relevant features by reference to the standard farm for the region.

In reality, there seems little doubt that the method of capitalized income and the method of sdes price comparison are often used in connection with one and the same valuation. Aereboe always suspected that “ the explanation €or the miracle that the majority of appraisers using the method he con- demned made more or less useful appraisals was that a t the very beginning


of each appraisal, experienced men had a preconceived belief concerning sale prices of farms in the district and that they skilfully adapted their elaborate calculations to that ' lump sum guess '-thereby secretly, or perhaps unconsciously, reversing the procedure."' I think there is a great deal to be said for developing the method of sales price comparison alongside the capitalization method. In the nature of things neither method can be expected to give accurate results which will invariably stand the test of time, because the figure given by any process of land valuation consists to no small degree in the present conception of income, which will be enjoyed .many years hence. This I take to be the real clue to the great variability of prices of apparently similar farms and the failure of the more obvious factors to account for all but a small proportion of price differences between unlike farms. Different purchasers entertain different anticipations of future possibilities, and it is beyond the powers of organized knowledge to rationalize these differences or bring them into the field of calculation. The imperfections of the real estate market are largely attributable to the limited scope of human foresight. When I calculate to what degree a valuation figure represents income which will not accrue until many years hence, I am impressed by the relative insignificance of the period of which the parties might be expected to have anything approaching the character of " knowledge "-say the coming five or ten years. In the table which follows I have shown the present capital value of ,6100 per annum for ever, the future income being discounted at various rates, and, corresponding to each rate, the proportion of that present value which is represented by income which will accrue in the first five, ten and thirty years respectively.*

TABLE IV.

PRESENT CAPITAL VALUE OF A CONSTANT EXPECTED ANNUAL INCOME OF L100 RECEIVABLE

IN PERPETUITY OR FOR CERTAIN GIVEN NUMBERS OF YEARS.

I

2% 1 3% \ 1-

income value i f 1 value I

I I I

i 10 I 898

30 1 2,240 44.8 I 1,960 58.8

5 47 1 9-4 ' 458 1 13.7

25.6

I Perpetuity 1 5,000 I 100.0 1 3,333 I 100.0

4% 5%

445

81 I 38.6

1,729

I t will be seen that even if a rate of discount as high as 5 per cent. is used (and we have seen that current valuations appear to indicate a rate well below this), over 60 per cent. of the present capital'value represents income which will not begin to be realized until ten years from now, and

* See Parry's Valuation Tables, 5th Edition (pp. 1-90), Inwood's Tables for the Purchasing of Estates, 25th Edition (pp. 49-85), or other standard interest tables.

Proceedings of Conference. 20 1

nearly one-quarter of the present value results from the capitalization of income which the next generation will receive (taking a generation as 30 years). At lower rates of discount the relative weighting of future incomes is, of course, heavier, and at 24-per cent. the first 30 years' income will account for little more than half the present capital value.

If there are anticipations of increasing annual incomes, the figures are still more striking. Two illustrations will suffice. We will consider first the simpler but less realistic case of an annual increase in annual income, continuing by arithmetic progression to perpetuity, thus : 1st year, LlOO ; 2nd year, ,6101 ; 3rd year, ,4102 ; ... nth year, L(lOO+n-l). Here the formula

I 2% - 3%

Number Present ~ Per cent. Per cent. of capital 1 of

years' value, perpetuity income 1 L value

5 1 481 10.5

20.0

49.5

106.3

10 I 937

a z is V=-+- . The table then reads :- r I s

4% 5%

Present Per cent. Present Per cent. capital/ of capital of

f 1 value i 6 value value, perpetuity; value, perpetuity

454 1 14.5 ' 441 18.4

33.5 27-0 I 804

61.8 ' 1,706 71.1

I

1,930

3,125 100.0 2.400 100.0

TABLE V.

PRESENT CAPITAL VALUE OF AN ANNUAL INCOME OF flea EXPECTED TO INCREASE BY

ANNUAL INCREMENTS OF 61.

Looking again at the 5 per cent. discount rate, it will be seen that on these terms the first 10 years' income constitutes only one-third of the aggregate present value, and even anticipation of 30 years' income still leaves nearly 30 per cent. of the present value to be attributed to the more distant future.

In the second case we assume that the annual income will increase by L1 a year for ten years, after which it will become stabilized at the level then reached, namely Q10. In some circumstances, land improvement schemes might be expected to give rise tn such a situation. The appropriate

), and the table reads :- formula in this case is V=Lf+j r r2 (l- ( I +Y)'+-'


TABLE VI.

PRESENT CAPITAL VALUE OF AN ANNUAL INCOME OF €100, EXPECTED TO INCREASE L1 ANNUALLY FOR TEN YEARS, THEN TO REMAIN CONSTANT.

Per cent. of

erpetuity value

Number of

years' income

Present capital value,

t

5

10

30

Perpetuit)

?er cent. Present of 1 capital

erpetuity value, value 1

2

Per cent. of

perpetuity value

Present capital value, L

8.8

17.3

44,6

100.0

48 1

937

2,412

5.408

467

889

2,107

3.593

44 1

804

20.6

37.5

Rate of discount

4% 5% I

Per cent. of

erpetuig value --

13-0

24 -7

58-6

100.0

Present capital vaiue,

f

454

845

1,855

2,686

16.9

31.5

69.1

100.0

As would be expected, these conditions give results which resemble fairly closely those of Table IV (constant annual income), though the perpetuity values differ appreciably.

In the light of these tables, any idea that valuation should proceed to the rigorous exclusion of long-term prognostications seems quite un- acceptable. A rational assessment would seem to require a ca<eful consideration of all trends and pointers. It cannot be claimed that such a procedure is, or is ever likely to be, " scientific." Economics is a relatively young and immature science ; yet as it gains in stature we may expect its powers of prediction to increase, both in the span of years which will come into its range of vision and in the particularity of application. Valuers should be among the first to take advantage of any such development. But the behaviour of the market, which is the final arbiter of value, will always be to some extent beyond calculation.

REFERENCES. 1 Bonbright, J . C. Valuation. Encyclopedia of the Socid Sciences. 1935. 1 Stewart, C. L. Journal of Farm Economics, XIX (1937). p. 189. (Discussion on 8

Haas, G. C. Sdc Prices as 4 Basis for Farm Land A p p ~ u i s d . University of Minnesota

Marshall, A. Principks of Economics. Eighth edition. p. 326. Hayek, F. A. Economics 4nd Knowledge. Economica, (New Series) IV, 1937. Reprinted

Smith. S. A. The Pvincipks of ValuutMn. Journal of Surveyors' Institution. January,

' Livers. J. J., and G. H. Craig. Role of Soil Depktiun in Land Valuation. Journal of

Brandt, Karl. Land Vduutiun in Germany. Journal of Farm Economics, XIX (1937).

Commitkc of Public Accounts, First, Second and Third Rcports from. Session 1948-9.

l o Kendall, M. C. The Finuncing of British Agriculture. Journal of the Royal Statisticvl

l1 Aereboe, F. Die Beuricilung von Londffiltern und GrundsirScRen. Berlin, 1912.

below.)

Agricultural Experiment Station. Technical Bulletin 9. November, 1922. p. 4.

in Individucrlism and E~onomic Or&. Routledge and Kegan Paul, 1949. p. 46.

1925. p. 360.

Farm Economics XXII (1940). p. 775.

p. 173.

H.M.S.O., p. 437.

Society. CIV (1941). p. 114,

The V d w ofLanded PiqPcrty. Bulletin of the International Institute of Agricultuie. NOS. 10-12. 1912.

Proceedings of Conference.

D~scussrow ON MR. BRITTON’S PAPER. R . van H e e s :

I am very grateful for the opportunity to attend this meeting.

203

With regard to the paper which has been read this morning, I should like to make one remark about valuing. If the population pressure increases in rural areas there may be a tendency amongst farmers to decrease their level of living and to pay more rent for land because it is becoming more and more scarce. The consequence may be that the high rents and the strong demand for land are reflected in high land values. If in these circumstances a Government wants to give the farmers a reasonable income, and in consequence wants t o influence the level of land values, then it cannot use the comparative method of Aeroboe. but it has to devise a method of appraisal which excludes the influence of the great population pressure.

A . Ashby: I should like to ask a couple of questions. In Table I Mr. Britton says that the number of years’ purchase is 28.7. This would

seem to be a considerably higher number of years’ purchase than existed in the 1930’s. I wonder if Mr. Britton would tell us what the number of years’ purchase on the net rent is a t the present time ? This figure of 28.7 refers to farms without vacant possession which have presumably been bought as an investment, and it is the number of years’ purchase on the net rent which determines the investment value of agricultural land in comparison with other possible forms of investment.

As regards Table 11, in the size group ‘ I 5 acres and under 50 acres,” most of the farms seem to have a very high capital value. I heard a report recently of a 14 acres field without any buildings which was sold for something like A570 per acre, the reason being that the land had been iicensed for a caravan site by the local Council. To what extent is the high capital value of farms in this group likely to be due to causes similar to this which are of a non-agricultural nature ?

T. W. Gardner: I must thank Mr. Britton for giving us a most interesting and stimulating paper.

The trouble I find in making a contribution to the discussion is that he has covered 50 many points, with the consequent difficulty that whatever one says one may only be repeating something which he has already touched on.

The aspect which I should like to concentrate interest upon is that of the value of farm land which, perhaps, we might call effective valuation. By. value I mean market value or price. Economic theory will lead us to stress two points m relation to the value of farm land. One is that the quantity of land is fixed, and in relation to any commodity of which the quantity is fixed there are certain peculiarities ; for example, you need a change in conditions in order to bring about a change in market price. The second point is that the demand for land is a derived demand. I think it follows from these two points in particular that the demand for land will be strong if the demand for production from the land is strong : and, secondly, that you will get a change in the demand and price if you get a change in conditions, such as a change in the relative demand for different farm products.

It is difficult to illustrate these things and any figures one can give are not conclusive on such points. I can quote only a few examples where the same farm has been sold twice within the last 25 or 30 years. One of these is a farm in north-east Oxfordshire on relatively poor land where mixed farming is carried out. In 1922 this farm was sold at an average of ;d31 per acre, and it was sold again in 1947 when the price was L35 per acre-a very small increase. Another farm, in south-east Oxfordshire, and similar to the Vale of Aylesbury dairying farms, was sold at the end of the 1914-18 war for A25 per acre, and again in 1947 for L47 per acre. But the most striking example was a farm in Cambridgeshire which was sold in 1933 a t L9 an acre, and sold again this year at ;d90 an acre.

I think one can get some further evidence for this difference in price by an analysis of sales over a year, for I have also been collecting particulars of farm sales. During I950 I have collected figures-not as detailed as Mr. Britton’s-relating to something over 50,000 acres of farm land in England. These figures in general give the same impression as Mr. Britton’s, that farm size and vacant possession are very important factors ; but by dividing them on a regional basis I get the following results.

For farms in western counties, mostly dairy farms, there was an average price of L68 per acre : for farms in eastern counties, which are mostly arable, L79 per acre ; and for the mixed farming counties in the Midlands A51 per acre. These prices, I would suggest, are related to the profitability of different kinds of farming at the present time.


The value of farm land is, in practice, the outcome of estimates of its capacity to yield income in the future. The danger in the period of prosperity is that the investors and buyers are usually over-optimistic. The capacity of a farm t o yield income in the future is affected by technique and changes in efficiency, and at the present time also by political decisions both here and abroad. Consequently it seems to me that when economists are asked to predict the value of farm land they are working at second hand-estimating, in fact, the value other people put on farm land.

H. C. H. Graves: I was interested in the last speaker's remarks in relation to what Mr. Britton has

said : ", The underlying pilosophy of Aereboe's method-which I have called the circumspective method-is that a property is ' worth ' what it will currently fetch, and not what a disinterested party thinks it ought t o fetch " ; does this not lead to the exaggeration of market values ?

I believe that the chief lesson of history is that we learn nothing from history. I have in mind a particular parallel, which I think illuminates the thesis that buyers in the mass attach too much importance to the speculative element, Although this parallel is drawn from another sphere, its lesson may be directly applicable to that which we are discussing.

It has been demonstrated reasonably conclusively in a serious financial periodical- '' The Investors' Chronicle "-that over a long period of years it is possible, provided one takes the elementary precaution of dividing one's money between, say, twenty different sources of income, to obtain both a higher yield and higher capital appreciation by investing in stocks yielding a high percentage, than it is by investment in either Government stocks or what are judged by the market to be safe industrial securities. The main criteria are :-

(a) that the investments must be freely marketable as evidenced by inclusion in the Stock Exchange official list ;

(b) that the concern in question should have a capitalization of not less than L1 ,OOO,OOO ; (c) that they should be taken in order from the 20 highest yielding shares on the

resulting list. which means that some will give yields even up to 12% or 14% and that the average will be in the neighbourhood of 8%. This obviously stamps them as being in what is popularly considered the highly speculative class :

(d) there are certain "rules" settling the occasion on which any given security is to be sold;

(e) as a result of these rigid criteria, personal judgment is eliminated and all actions are directly contrary to market opinion !

The writer has reviewed this year after year and he has not yet missed in the 8 or 10 years I have been following his theorising. I have not been able to put it into practice, unfortunately ! The obvious deduction is that in estimating the speculation risk the considered judgment of the market is fallacious ; they always think it is greater than it is : but they always think that the security of the more secure investments is greater than it is. I do suggest that it may make it very difficult to accept the underlying philosophy of Aerboe's method. The idea that the property is worth what it will currently fetch does not seem to be philosophically justified.

C. W. Roberts: I should like t o congratulate Mr. Britton on producing a paper which will be of

considerable interest to research workers, teachers ,yd students. In that connection I am glad to see his footnote about the meaning of

I should like-a point which has already been touched-to see some attempt to split off from the prices of whole farms the potential prices of the farmhouses.

It may be interesting to note that in Scotland the term valuation is most frequently used with reference to,!he estimation of annual value-or as it is called, the assessed rental- a component of " a. In the standard book on the law of valuation in Scotland, for example, there is little reference to capital value. In that book the author notes three principles which are recognized for the determination of the annual value of property occupied by its owners. They are, firstly, comparison with the rents of similar let property ; 'secondly, consideration of the capital cost of construction, and thirdly, consideration of the net revenue accruing from occupation-a matter to which Mr. Britton has referred.

Incidentally, in calculating " a," it seems desirable to refer, not to what we normally consider as net income but to net income less taxation, because tax liabilities and allowances on land ownership differ from these on other investments. This affects both " a " and L c r '' of the formulae.

one other matter ; is not the partial monopoly of sitting tenants due rather to the Agriculture Act, 1947, than to the Agricultural Holdings Acts ?

Upwards in boom times, downwards in times of slump.

years' purchase."


An illustration of the way in which the era of guaranteed prices and assured markets fails to remove risk is given by the case of an early potato grower on the coast of Ayrshire who told me the other day that the removal of the acreage payment and the increase of fertilizer prices through the removal of the subsidy would leave him about 613 an acre worse off. He would have to find some way of making another L2.000 if he was to maintain his net income.

Dr. Price : The income capitalization method of valuation appears to be essentially a n ex ante

theory of valuation in that it explains what constitutes an economic price for the plot of land under review in relation to a given future annual income and the current rate of interest. Where transference of land to a higher use such a from agriculture t o urban use is likely to occur it may prove a useful tool in assessing the value of such land in a free economy. In assessing the value of land which is likely to remain in its present use, however, it seems much less appropriate. S6me American economists have found that the price paid for agricultural land is much more closely related to farm incomes for the years immediately preceding the year of purchase, or in the year of purchase itself, than it is to earnings which actually arise over a series of years following the year of purchase.

H . T . Williams : Mr. Britton has compared pre-war estimates of the value of the landlord‘s capital

with a statement on landlord’s capital made by Sir Donald Vandepeer in 1949. Comparing the two sets of figures, he concludes that quite widely different rates of capitalizing net rents have been used. I am not sure that this is necessarily true. The figures for 1949 are based on a conventional rate of capitalizing the average rents at that time and the average rent of farms has not changed since before the war in anywhere near the same proportion as the prices of farms sold. Bearing this in mind the two sets of figures may not be incompatible with one another, but rather represent different things. The 1949 figures are more a measure of original investment than of the current market value of farms and buildings.

A. J. Wynne : I was very interested in Mr. Britton’s paper. He has touched on almost everything

which comes into the picture, but there are some points I should like to see developed a little further. Rented landand land with vacant possession are quite different from the point of view of valuation, and I think it is very important to keep the distinction between them clear. In the latter case there are many complicating factors affecting value : one which has not been mentioned is the increasing longevity of farmers, which has reduced the supply of farms and, therefore, increased the demand for those which are available.

I think the case of rented land is very much simpler, but there are a number of factors which have to be taken into account in explaining what has happened. Mr. Britton referred to the “ general economic structure.” When anyone is concerned with investing money he has to consider firstly the alternative incomes available from different investments and secondly the alternative risks. Risks, on the basis of the experience of the last few years are, in my view, very much the more important, and this explains to some extent the very great demand for land today. Any money invested in gilt-edged securities, say ten years ago, has lost about half its value in terms of purchasing power. Investment in land has been much safer. Another point is the distribution of available capital. The man who is going to invest money in land must have a lot of money to invest. It is very speculative for the man with limited capital. The investor with plenty of capital can spread his risks by spreading his investments. Hence the distribution of available capital is quite an important factor in the land market.

Another point which is important today-very much more important than it was 20 years ago-is the prospect of capital profits. I don’t know how important that is in relation to land, but I am sure it is very important in relation to housing property, for example. If you buy 1,000 houses which are rented now you have every prospect of selling a proportion of them within ten years with vacant possession, at a large profit. some of which may be free of income tax.

I n the paper a formula is given, quoted from Professor Karl Brandt, referring to a “ normal rate of interest.” I don’t know what a ‘‘ normal rate of interest ” means. I don’t think you can apply a normal rate of interest. It has to be a rate of interest which people expect from this particular type of investment if the formula is to have any validity.

206 Agricultzcral Economics Society.

W. J. Thomus: I should like to take up a point which Mr. Andrew Ashby has already raised. On this question of capital values in relation to net rents much depends on what

we take as net rents. If we are calculating net rents as gross rents less maintenance, statutory charges and cost of imfwovcmcnts we come to a very low figure of 516 per acre on the 1946 enquiry and to 2/10 per acre on the 1947 enquiry recently written up by Dr. Dawe. As a return on investment, this compares very unfavourably with other forms of safe investment, even investments which might be expected t o hold their value equally with agricultural land. This must mean that there are factors in present valuation other than the direct return or income on invested capital.

I suggest that one of the factors is that people may invest in land in order to avoid the full force of death duties, bearing in mind the 45 per cent. remission of duty on agricultural land. But there are other cases, such as, for example, Insurance Companies who are buying farms even though they continue to maintain the current occupiers. This may be done with the prospect of getting vacantpossession later on ; as Mr. Britton has shown, the monetary value of vacant possession is a very substantial one. Another factor which tends tcj push up the price of owner-occupied farms is that they are sometimes used as a means of investing capital in improvements. A buyer, often a n established farmer, may take a farm with vacant possession, improve it, and charge a fair proportion of the improvement costs against current income. He will later capitalise those improvements by selling, thus avoiding, to some extent, the incidence of taxation.

Even when these other factors are taken into account, it is difficult to reconcile the present-day selling values of farms with the low net rents they yield. One is therefore prompted to ask whether the sample of estates studied in the recent enquiries is truly representative of all estates, or whether the last few years have been ones of extraordinary investment by landowners, thus explaining to some extent the present low figure of net rents ? Or can it be that in these enquiries it is not possible to provide as much scrutiny of the original material as might be desirable ?

J . J. MaGregor: The last speaker drew attention to an aspect which finds illustration in this week’s

“ Economist,” where an analysis is given of landowners’ expenditure in recent years. Incidentally, this draws attention to the dangers of evaluation of land on the basis of net income alone, when the latter is calculated after including expenditure on permanent equipment which has been stimulated by taxation concessions. The present taxation does offer incentives towards investment in equipment. although possibly i t may not have any immediate benefit to the landowner in higher rent,

There is another aspect of land valuation which is associated with the high degree of monopoly in land sales. In this connection I am surprised that no one has mentioned the effect of the Town and Country Planning Act which must greatly increase the number of unwilling sellers as land, in theory at any rate, is supposed to be sold at its existing use value.

Over the last century a German method of discounting expected future incomes, the expectation value associated with the Faustmann formula, has been used in economic studies of forestry. The fundamental data for these calculations are obtained from yield tables. The expected future income is estimated from these tables, and the income and expenditure are weighted by compound interest over the period. and the rate of interest which balances these two things gives the soil value. Conversely, if the actual soil value is known the same calculation can be used to determine the rate of compound interest earned in the forestry investment.

Ih. Dawc: Someone bas referred to the preferential rates of estate duties on agriculture, and

1 ask myself how losg these might go on. If this country gets more and more pressed to find more and more money from less and less capital resources I don’t think these will prolonged for many years. I think that is one factor which wil l cause Mr. Britton‘s formula to be somewhat vitiated.

I think Mr. Wynne referred to capital profits being free of tax. I am not SO sure. 1 don’t know whether football pools are capital profits, but we tax them and probably we shall begin to tax other forms of capital. Last year we made a s t a r t with a capital levy.

Whether we shall ever have land nationalisation or not I don’t h o w . Some of US think that might come, and I can imagine all our forecasts of future values and incomes from land may be rather upset. It seems to me that we have not really got to forecast the economic trends, but the political trends, and I suppose in a broad definition of economics we have to consider the socio-economic trends too. That is why I don’t like these formulae.

Proceedings of Conferme. 207

P. ScoL : I think the great difficulty in examining the various data we have collected is to

see what sort of sense we can make of them. It is one thing to make theories. We have figures of farms sold with and without vacant possession, but we don’t know what types of farms they are and it is therefore extremely difficult to come to any conclusion as to whether the changes in value which appear to be thrown up are really due to changes in some objective sense or to the fortuitous combination of farms in the sample. It seems to me very difficult to analyse records of this kind.

Mr. Britton has taken vacant possession and non-vacant possession as his bases, but there are, of course, other differences, both legal and circumstantial, which affect people taking part in such sales. The type of farm is unfortunately often not recorded. In Scotland we have been looking into that. I think it an important matter because where capita investment is being encouraged in certain types of land and farming, especially in upland regions where subsidies are being paid by the State, proprietors may find adequate recoup- ment of the total expenditure in the sale price of the land. The upshot is that in general in Scotland we are now able to get quite a lot of information from outside sources about the particular farms which have changed hands and of which we have records. We know every entry of rateable subjects in the local valuation rolls and that enables us to know what the rent theoretically is for each farm. We can, therefore, assess in a rather crude way what the year’s purchase will be from the sales which have taken place. But there are so many different classifications-the vacant possession or not, the type of farm, rent before and after sale. What exactly can we get out of this data ?

B . L. Smith: There is also the pressure on the buyer to buy, or the sum of pressures. For example.

a man has to get out of his farm for some reason. If he is going to continue his livelihood he is obliged to pay a price to get a farm which may have no relation to the value of that farm.

H . C . H . Graves:

used to draw the attention of prospective clients. A city friend of mine used to have framed behind his desk a little jingle to which he

I t went like this : After the rise the fall, After the boom the slump, After the ” fizz ” and the big cigar The cigarette-and the hump.

J . Hammond : There is just one point I would like to make : that in all the comparisons of value

made this morning I think you have been comparing the return from capital invested on farms with that of British Government securities-British Government securities. I repeat those words deliberately, because on the Continent for some years the comparative yield has been something like this : from continenbI securities 6% or 7% yield ; from farmland 1%. In other words, there was a flight from Government securities to land. I am just wondering how much that is taking place here and how much that will upset all your calculations and methods of valuation.

Chairman : I think perhaps it is a little unfortunate that we have not amongst us a practising

land valuer. YOU may have h e y d the story of the Yorkshire Valuer who was asked how he did his job. He said that he cum,” he saw, and then he knew ! I think that sums up how land valuation is carried on.

With regard to Mr. Britton’s paper I would like to throw another question at him. I would like to know whether he has been able to obtain any evidence about the effect of mechanisation on land values. Theoretically, i f mechanisation does what people claim i t does-increase profits-one would expect that the effect of mechanisation would be to put up the relative values of large farms. Has Mr. Britton any evidence that the values of large farms are going up because of the advantages of mechanisation ? Again, on the Same line, is there any evidence that the ploughing up of old pastures and putting them down to better pastures has had any marked effect on land values ? One would expect that it has. I think this shows how very complicated the problem is. Has Mr. Britton any information about the effect of general improvements on land values ?


D. K . Brittm : I am grateful to Mr. van Hees for his observation about the inflationary effect on

land prices of over-population in rural areas. I would certainly agree that where govern- ments intervene to control the sale price of land it becomes impracticable to resort to the salescomparison method for valuation.

Mr. Andrew Ashby asked what I thought might be the year's purchase today on the basis of net rents. Firstly, just as it is almost absurd to try to say what is the average price today of a farm of 100 acres, because of the great variation between farms, 90 there are also very great differences in years' purchase between farms of comparable size. I would have to be guided by the kind of figures that Dr. Dawe and I have obtained from the Country Landowners' Association enquiries, where it was found that on the average about 57% of landlords' gross rents has in recent years been spent on ordinary maintenance, management and insurance. So that nearly two-thirds of the gross rent is going on landlords' expenses quite apart from improvements. That looks as though the year's purchase would be at least double the figure of 28.7 given in Table I, if we are going to consider simply cash terms.

Mr. Ashby also asked what effects the high prices of smallholdings in the f i rs t column of Table 11. It would be very helpful if we could separate out the effect of the dwelling in that figure. The separation of residences-with-land from farms proper was a problem in picking these data from the Estates Gazette. We began by not going lower than 5 acres. Our guiding principle is that if the word " farm " appears in the description of the property we bring it into our analysis.

Walmsley. who is one of the professional experts on rentals and valuations, not long ago suggested to the Chartered Surveyors' Institution that we should cease to think of land in terms of f per acre and have two elements in a valuation, namely, the price per acre without buildings and the flat charge for buildings and permanent improvements.

Mr. Gardner spoke of the wide variation in price increases in different farms. He mentions three areas in this country which have shown different movements. Perhaps I can answer later speakers now on this particular point. We have not been able to get anything out of these recent statistics yet on the subject of regional differences. There are not many farms here-not enough to enable any deductions t o be drawn. From the inter-war figures which I have studied-an average of about 250 farms every year for about 22 years-we did get one item of interest : that during the slump in agricultural land values the small holdings kept their values much more than the large ones. That itself is a thing worth analysing much more closely. There is always a market for the small holding compared with the large one because a smaller amount of capital is needed.

As to political decisions, which several speakers raised, I entirely agree that these formulae do not take account of changes in the political climate. If the formula does not account for i t then the mental addition has to be made by the buyer. I think that the very fact that prices being paid today seem to represent a very high year's purchase shows that the buyers have confidence that the existing system of guaranteed prices has come to stay, at least for their lifetime.

About Mr. Graves' point on not learning from history. I am not sure that he is fair in saying that that is a criticism of the philosophy,,underl*,g Aeroboe's approach. YOU see the difficulties. The terms in the formula '' a and " r .are not strictly arithmetic things. The additions or subtractions from the point of view of the farmer's interpretation show his confidence that what he sees today is going to persist. Because the formulae cannot explicitly account for all those factors it does not mean that they are to be abandoned although, as I hope I have indicated, I have come down much more in favour of the sales comparison method than the income :tpitalfyt$n method. But the interpretation still has to be put into these two terms a and r according to how the market is valuing these less obviously accountable factors.

From Mr. Roberts we had a reference to the value of the farmhouse, which I have already touched upon. I wish we could analyse our figures according t o Walmsley's method. I t is quite obvious from what Mr. Roberts has said that Scotland has more information on these things than we have.

Mr. Williams rose to defend Sir Donald Vandepeer on the grounds that rents have not risen appreciably-I think it is about 20%-and argued that it would therefore not be right to show a great increase in the capitalised value of our land and equipment. I disagree with that. I think that until they have risen to a more realistic level rents should not be referred to at all in attempting to evaluate landlord's capital in aggregate.

Mr. Wynne expanded the conception of " r :', by referring to risk. I thought we had tried to cover that in the discussion of " r." " r is not simply an assured rate of return. but goes up or down according to one's estimate :f the reliability of the level being maintained. Karl Brandt's " normal rate of return does not mean the normal rate of

I


return on stocks and shares of one particular variety, but on agricultural land ; that is, the rate of return on land which land investors were taking as acceptable to them a t the time.

Mr. Thomas pointed out that if one dealt with net years’ purchase, years’ purchase must be very high today, probably exceeding 100. That emphasises that we cannot just consider cash income. You must say, therefore, that people buying farms today are paying for something much more than the anticipation of income ; for some other human satis- faction which they get ou t of their farms. They are paying for their idea, which is reflected in the whole community, that land is a good investment in times of monetary upheaval. And there is this about it, that farmers will pay a great deal to add to their existing farm. T6is does not just apply to small pieces of land, but to whole farms.

Certainly it would be very valuable if we could look more closely into the rent figures provided in the Country Landowners’ Association’s returns. I suppose there is a natural tendency to suspect any statement made by landowners themselves about the value of improvements, because they are interested parties to the result of the enquiry. At any rate the economist asked to review these results has not, I think, been given an opportunity to cross-question or follow up very closely individual returns. He has been presented with summary tables and expected to give his interpretation from the summaries.

Dr. Dawe says that capital profits may be taxed in future, and land nationalisation may upset the working of the formula. I think I have said enough to suggest that I interpret the formula as being eiastic enough to allow new estimations of what permanent and existing set-up has to be taken into account. If a new government comes in which is less trusted than the present one to maintain the,+griculture Act, then I suppose our confidence in the stability of income would fall and

Mr. Scola, I am sure, is absolutely right in saying that we must examine the make-up of a sample like this in as great detail as we can. We are again limited by what the Estates Gazette tells us. We can tell what county a property is in but cannot actually locate it to a parish. I doubt if this number of farms makes it worth while to do a geographical sorting yet. One of my colleagues at the Institute has been studying the question of mechanisation in different counties in this country at various dates and finds that Kent, Sussex, Hertford and Middlesex have a higher proportion of their power as mechanical power than the rest of the country. If the geographical analysis of farm sales showed that farm prices had appreciated more in this south-eastern region than in the rest of the country we might be able to go some way into that question; but the question is complicated by the sire-of-holding factor. We did find that between the wars the arable counties recovered more sharply in price in the 30’s than did the pasture counties. But that was not so much the size as the kind of farming being carried on.

Mr. Smith mentioned personal factors which cannot possibly be taken into account in any formula, and said that prices may be paid in these circumstances which bear no relation to the value of the farm. I think that is a bit excessive. I think that usually about two-thirds of the valuation can be accounted for by physical factors and the other one-third by such factors as these. That is what characterises the real estate market ; a bigger proportion of prices must be attributed to these invisible factors.

All the analyses I have been able to do on sale prices take account of very few factors : size, location, possession or non-possession. The proper way to do it, if we had sufficient numbers of farms, would be to get hold of the particulars of sale of each and study field layout, refer to a June return for stocking and cropping, refer to a machinery return for tenant’s capital, and do a grand analysis of all those factors ; and perhaps one day we shall come to do it.

Chairman : We are very much indebted to Mr. Britton for his paper on the ‘‘ Principles of

Valuation of Land and Farms.” Until this morning I had always thought the study of farm management to be the most complicated of all studies in farm economics. I am not so sure now ! The valuation of land seems even more complicated. I think Mr. Britton has given us an extremely useful paper and I would like to compliment him pahcularly on the way in which he has replied to the many questions which have been raised.

r ” would rise.

principles of valuation of land and farms

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