The Economic Value of Residential Land in Historical Areas: An Application of the Residual Method to the Secondary Market

Abstract

Land value bears significant weight in house prices in historical town centers. An essential aim for regulating the
mortgage market, particularly in the financial and property crisis that countries such as Spain are undergoing, is to
have at hand objective procedures for its valuation, whatever the conditions (location, construction, planning).
Of all the factors contributing to house price make-up, the land is the only one whose value does not depend on
acquisition cost, but rather on the location-time binomial. That is to say, the specific circumstances at that point and at the exact moment of valuation. For this reason, the most commonly applied procedure for land valuation in town
centers is the use of the residual method: once the selling price of new housing in a district is known, the other
necessary costs and expenses of development are deducted, including those of building and the developer’s profit. The
value left is that of the land.
To apply these procedures it is vital to have figures such as building costs, technical fees, tax costs, etc. But, above all, it is essential to obtain the selling price of the new housing. This is not always feasible, on account of the lack of newbuild development in this location. This shortage of information occurs in historical town cities, where urban renewal is slight due to the heritage-protection policies, and where, nevertheless there is substantial activity in the secondary market.
In these circumstances, as an alternative for land valuation in consolidated urban areas, we have the adaptation of the residual method to the particular characteristics of the secondary market. To these ends, there is the proposal for the appreciation of the dwelling which follows, in a backwards direction, the application of traditional depreciation
methods proposed by the various valuation manuals and guidelines.
The reliability of the results obtained is analyzed by contrasting it with published figures for newly-built
properties, according to different rules applied in administrative appraisals in Spain and the incidence of an eventual correction due to conservation state.