Income and density spillover effects in German land prices

Abstract

Purpose This paper aims to investigate the role of county-level income and population density effects in explaining spatial variation in German land prices from 2014 to 2018. Motivated by recent evidence that land values account for a growing share of housing price dynamics, our analysis pursues three core objectives. First, we quantify the direct and indirect effects of county-level agglomeration variables on land prices. Second, we evaluate the extent to which spillovers in land prices contribute to clustering patterns in major German cities and their suburban counties. Third, we assess whether these effects differ by land type – comparing residential land with vacant land designated for development. Design/methodology/approach Our main empirical model of interest is the Spatial Durbin Model (SDM), which allows for both endogenous spatial dependence in the dependent variable (prices) and exogenous interactions in agglomeration-related covariates (e.g. median income, population density). Findings We find that spatial agglomeration effects, especially in income and density, exert significant local and neighboring effects on land prices. Specifically, a 1% increase in median income leads to a 1.5–2.5% increase in local land prices and an additional 0.5–0.9% increase in neighboring counties. Similarly, a 1% increase in population density raises land prices by 2–3% locally and 1.5–2% indirectly. These effects display greater intensity in suburban counties near large metropolitan areas. Finally, the effects are more pronounced for residential land than vacant land, consistent with the idea that realized use and regulatory constraints magnify spatial externalities in housing markets. Originality/value We contribute to the literature on agglomeration and housing price dynamics by explicitly modeling income- and density-induced spatial spillovers in land prices using a spatial panel framework. This paper thereby provides a link between the literature on spatial housing dynamics, agglomeration variables and land valuation. Our findings suggest that policy interventions targeting housing affordability or regional price disparities should account not only for housing demand and supply but also for the spatial diffusion of land price shocks, especially in high-productivity regions experiencing density-driven growth.