Discussion Paper Series, 16(10): 223-252
Land Speculation and Property Market
(In)Efficiency
Nikolaos Triantafyllopoulos
Department of Planning and Regional Development,
University of Thessaly
Abstract
This paper places land speculation within the geographical context of a
tourist-agglomeration development process in Greece, based mainly on
the elaboration of diachronic cadastral data. The economic and financial
dimensions of land speculation on market efficiency are explored,
through a socio-economic perspective. Land property ownership
structures, state policies and bank financing practices have produced
synergies that encouraged land speculation, with ambivalent effects on
space, property markets and tourist activities. Finally, it is argued that
land speculation may be regarded as a socially embedded rational
action, which leads to an overall inefficient land market.
Key words: land speculation, property market, rational action, market efficiency
May 2010
Department of Planning and Regional Development, School of Engineering, University of Thessaly
Pedion Areos, 38334 Volos, Greece, Tel: +302421074462, e-mail: [email protected], http://www.prd.uth.gr
Available online at: http://www.prd.uth.gr/research/DP/2010/uth-prd-dp-2010-10_en.pdf
Land Speculation and Property Market (In)Efficiency
225
1. Introduction and literature overview
‘Orthodox’ economic literature on property markets usually adopts the neoclassical
approach of a perfect and efficient market, although by the start of the twenty-first
century, the efficient market hypothesis has become less universal (Malkiel, 2003) and
new relativist concepts are now in the making. The concept of market efficiency has
been transposed by the financial asset markets, as demonstrated by the application of
the well-established neoclassical-economics “zero-profits theorem”, introduced by Louis
Bachelier (1900) in his outstanding doctoral thesis entitled “The Theory of Speculation”.
Most literature work focuses on the impact of information-processing efficiency in the
property investment market on other financial asset markets. However, many
researchers consider that, in practice, the market is imperfect and inefficient, because
properties are heterogeneous, information and transaction costs are high, assets are
indivisible, the trading quantities in any particular market are low, and there are barriers
to entry (Harvey, 1996; Evans, 1995; Gatzlaff and Tirtiroglou, 1995). Some researchers
argue that market efficiency is not an absolute concept and that “even with their
potential imperfections, real estate markets can be modelled today in terms of efficient
markets” (Gau, 1987, p. 2). Gatzlaff and Tirtiroglu (1995) directly relate property market
efficiency to price formation, as they point out that market efficiency does not require
markets to be frictionless, assets to be infinitely divisible, or assets to be mobile, but it
does require that market imperfections are fully and rationally reflected in the market
price.
From the neoclassical economics point of view, any market is based on competition,
and the concept of Paretian market efficiency presupposes a perfectly competitive
market in Walrasian equilibrium (Dokko & Edelstein, 1992; Ball et al., 1998), where the
attributes of space, time, uncertainty and externalities do not appear as problems.
Ludwig von Mises maintains that every action is economic, and that everybody
speculates. He proposes an economic praxeological theory, embracing action in pursuit
of the quest for advantage (profit), rationality and uncertainty (Demeulenaere, 1996, p.
209), which are some of the basic ingredients of the market efficiency notion.
From the institutional point of view, in their relevant work, Keogh and D’Arcy (1999, p.
2406) suggest that “conventional treatments of efficiency have been inappropriate on
three main grounds. Firstly, they fail to capture the essential characteristics of real
property as a physical and legal entity. Secondly, they provide an inadequate
interpretation of the ‘property market process’, as the means by which trade in property
occurs. Thirdly, they largely focus on information efficiency excluding allocative and
operational efficiency”. In an analogy to Simon’s idea of ‘bounded rationality’ (Simon,
1945), they introduce the attractive concept of ‘bounded efficiency’, through which the
broad consideration of the institutional environment is proposed, with reference to the
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Nikolaos Triantafyllopoulos
‘efficiency for a person’, in the sense that efficiency may have a different meaning for a
single person or a group of actors. The institutional approach to property market
efficiency of Keogh and D’Arcy (1999) considerably enriches and advances the
economic thought surrounding the property market, by leading to a more partial and
contingent judgment on observed levels of achieved efficiency. They interestingly direct
and synthesise the discussion to a wider approach towards the property market than
that of the neoclassical price formation mechanisms approach, which is the essence of
the initial efficient market hypothesis, introduced by Fama. They tend to overcome the
boundaries of the economic literature, but they do not explicitly connect their approach
to the sociological and socio-economic perspectives of efficiency, rationality and market
diversity, which were largely discussed following the works of primarily Max Weber
(1925/2003), John Stuart Mill (1848) and Braudel (1979), together with many other
eminent intellectuals. For Polanyi (1944/2001), markets are rather comprehensive social
institutions, reflecting a complex alchemy of politics, culture and ideology (Krippner,
2001), while Beckert (2002, p. 294) argues that “economic sociology joins institutionalist
approaches in economics that have long since moved away from the idea of an actor
acting as a universal optimiser”. But, just like mainstream neoclassical approaches to
land and property market efficiency, heterodox and institutional approaches have up to
now remained virtually non-spatial – to the best of our knowledge – and have avoided
paying particular attention to the attributes of property as a constituent of space.
According to Fisher (1992), land presents its distinctive attributes, differently from those
of buildings, which are increasingly becoming a capital and a financial asset, and their
markets are different, although closely interrelated. The market for tenant space – in the
form of land – and the market for investment capital are two distinct but interrelated
markets, and “the use decision is made in the space market, whereas the investment
decision is made in the capital market” (Fisher, 1992, p. 161); but as Gaffney (1994)
points out, “capital occupies space, land is space”. In its approach to property market
efficiency, neoclassical economic doctrine ignores land and its geographical attributes;
thus land is explicitly or implicitly melded with capital. Considering land as a capital, the
question of land rent and its production, within the systems of production of goods and
services, is usually overlooked. From our point of view, this occurs because in
neoclassical economics, the terms of land rent and land value are equivalent to market
value or price. Therefore, capitalised land rent is equal to land price, which contrasts
with the social economic and the neo-Marxist tradition, where land value is unrelated to
market price. Burgstaller (1994) argues that arbitrage and speculation in capitalist
economies is the most fundamental mechanism of price determination and resource
allocation, while Evans (1995) underlines that the crucial point of market inefficiency is
the fact that the price of a property is not determined by the market. In his theory of the
determination of the price of land, Evans incorporates the concept of supply into the
classical theories, paying particular attention to the importance of government
intervention in land markets, the patterns of ownership, uncertainty and speculation,
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
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thus allowing an institutional perspective on price formation. This is in contrast to
neoclassical economists, for whom speculation is somewhat overlooked in their price
formation studies (Evans, 1983, 2004).
In the property market, the term “speculation” is commonly used as follows: Firstly,
almost as a synonym of “investment”, and thus concerning arbitrage in the equities
markets, where investors’ expectations are sometimes shaped in an inaccurate way
(Malpezzi and Wachter, 2005). Secondly, the term designates the act of investors who
purchase land, but keep it vacant without making any improvements to it, thus realising
‘unearned increment’, or in anticipation of future development opportunities, or they
delay development until the uncertainty about the most profitable use is clear, this option
being mostly related to planning regulations (Evans, 1983, 2004; Gaffney, 1994). Alfred
Marshall (1890/1997) differentiates speculation in the stock and commodity exchanges,
where a speculator renders a public service by pushing forward production where it is
needed, while a speculator in land is someone who renders no such public service,
because the stock of land is fixed.
In most countries, urban planning professionals are confronted with land speculation,
where the agenda for urban infrastructure is geared towards the development or
extension of city plans and urban sprawl control (Arrago, 1969; Archer, 1973; Marini &
Remond, 1976). A comprehensive resource on speculation in planning, speculative
practices and their effects on urban development are the classic works of the sociologist
Maurice Halbwachs, based on the study of the major works associated with the
regeneration of Paris in the 19th century, conducted by Baron Haussmann (Halbwachs,
1909, excerpts in Roncayolo and Paquot, 1992). For Halbwachs, speculation is a
method of dealing with the uncertain future. Faced with uncertainty, the speculator
adjusts his actions, in order to best accomplish his ends, relative to the expected actions
of others and of the physical world. This requires every person not to create the future
situation, but to speculate about it and try to understand the future, to think and
hypothesise about various probabilities and options.
The impact of land speculation on economic progress is a subject for lengthy debate.
For Henry George (1879/1997) and other “heterodox” economists, using real estate
property not for production use, but in order to earn profit from future anticipated price
increases, may be a fundamental cause of both micro-economic and macro-economic
disturbances. They identify land speculation as a destructive and destabilising force in
progressive economies. They maintain that land speculation, supported by an “elastic”
or accommodating banking system, is a major underlying cause of economic
depression. For neoclassical economists, the effects of speculative prices on growth
and welfare are disputed. For Samuelson (1958), the speculative price increases are
wealth-enhancing, because they complete existing markets. For Tirole (1985), they arise
only in dynamically inefficient equilibrium, where too much capital has been
accumulated. Consequently, as high speculative prices shift savings away from
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Nikolaos Triantafyllopoulos
investment in physical capital, they also raise welfare. According to other authors
(Grossman and Yanagawa, 1993; King and Ferguson, 1993), the effects of speculative
price increases crucially depend on the particular asset that is being speculated about.
In equity markets, they can be growth-enhancing. But when they are focused on
unproductive assets, both investment and growth decrease, and they have a more
nefarious effect on dynamic models with externalities. Thus, as speculative prices turn
savings away from physical capital, they lower growth and welfare (Olivier, 2000).
Finally, the appropriation of speculative rent by landowners also raises the problem of
“enrichment without reason”, social equity and fair distribution of revenues produced by
the society as a whole. The ethical foundation of this problem resides in the established
wisdom advocated by John Locke, according to which the Earth should be treated as a
common property and heritage for all, in terms of universal rights to life, liberty, and
“estate”, i.e. land, and private property rights are embodied in one’s own output and the
right of appropriation of the product of one’s own activity (Feder, in Foldvary, 1996;
Beckert, 2002).
The aim of this paper is threefold: a) to consider land speculation within a definite
geographical context, through the diachronic consideration of land ownership structures,
the behaviour of all identified agents, the planning regulations and development policies
in effect, the taxation system and the financial institutions; b) to demonstrate that land
speculation is a crucial ingredient of property market (in)efficiency, but c) that although
markets may be inefficient, the speculative actions of the actors may be considered as
rational and efficient, when they are considered within their geographical and
institutional context.
This paper is organised as follows: information on the key study area, the data
resources and the methodology is provided in the following section; then, the focus is on
the reasons of the land prices increase; the third section examines evidence of land
prices increase, and then, in the following section are examined the role of the tourism
sector financing system is examined; finally, in the concluding discussion, the main
arguments of the paper are summarised, and another point of view is proposed.
2. The area of study, materials and methodology
For our field of study, we have chosen the tourist resort of Faliraki, on the island of
Rhodes, which is one of the major tourist destinations in the Mediterranean. Rhodes has
a land area of 1,398 sq km and in 1991, had a population of 98,300. In fact, the island
has a total accommodation capacity of 68,000 hotel beds, and more than 35,000 beds in
rented rooms, apartments and studios. According to the Greek National Tourism
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
Land Speculation and Property Market (In)Efficiency
229
Organisation (GNTO), tourist arrivals were about 214,000 people in 1970, rising to
718,000 by 1980, 1,134,000 in 1990, and in 2006 they exceeded 1,200,000.
The tourist resort of Faliraki is situated 15 km from the city of Rhodes, on the east coast
of the island. The permanent inhabitants of the settlement number are less than 300
people. The development of the resort began in the early `70s, but it was particularly
intense during the `80s. According to data from the Chamber of Hotel-owners of Greece
as well as local community estimations, in 2000, Faliraki had an accommodation
capacity of more than 13,000 hotel beds and 9,000 beds in small units of rooms for rent.
The urbanisation of the area was achieved without an urban plan and began in the nowdense urban centre – which for the purposes of this study is designated as Zone A
(Figure 1), and has expanded throughout a zone along the coastline. In the north part of
Zone A, large upper-class hotels (with more than 500 beds) were created. As time went
by, facilities were dispersed into the hinterland, although that area was still
predominantly agricultural. The rest of the study area, outside Zone A, is designated as
Zone B (Figure 1).
The main source of quantitative data on land transfers and transactions was the
Cadastre of Rhodes, which was developed by the Italian administration of the island and
was similar to the German cadastral system (Grundbuchsystem), providing an absolute
guarantee of property ownership. Information on land prices was provided by the
transaction contracts registered in the Cadastre and the Tax Office of the Inland
Revenue, together with on-site research.
The cadastral investigation provided two categories of primary data covering the critical
30-year period, from 1965 to 1995, when the transition from a rural area to an urban
area was established, as the development of tourist resorts in the Mediterranean market
took place. The first series of data concerns the annual number of plots or property
rights on plots that were sold in the entire area of the community including urban
centres, where 1,624 transactions were registered. Within the boundaries of the
community lies our study area, which is larger than the tourist resort of Faliraki, and is
prescribed by a sea view from the surrounding crest, based on the fact that this area is
the most suitable for tourist development. The marking of the transactions on the map
proved that outside the area of study, behind the border-crest, transactions were scarce.
Moreover, although the area of study constitutes about 20% of the whole area of the
community, during the period of study, about 60% (945) of the 1,624 transactions took
place within in (Figure 2A). This has confirmed the adequacy of the delimitation of the
study area. The second series of data refers to detailed information on the transactions
relating to a 393-plot sample, where 721 transactions took place; they have been
individually studied. The sample used for the study of property mutations consists of 111
plots within Zone B, and 282 plots within Zone A, as the later presents the greatest
interest for the tourist development during the entire period of study. The sample
consists of randomly-selected, adjacent land plots, using their cadastral registration
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Nikolaos Triantafyllopoulos
numbers (Figure 2). This sample well represents land market fluctuations during the
period of study (Figure 2B).
The period of study (1965-1995) is divided into four sub-periods, firstly according to the
transaction data (distribution breaks appeared in 1975, 1985 and 1990), and secondly
because the sub-periods correspond to the stages of the development of tourist
activities in the area. Property ownership is regarded as a piece of personal information
and access to it is restricted to lawyers. With special permission granted by the Ministry
of Justice, we were allowed access to the cadastral archives for a limited period of time.
However, we did not have the right to communicate data and visualise property
transactions in map form, and for this reason only the location and the relative surface
area of each land plot concerned are presented on maps (Figures 3 and 4).
3. Structural factors affecting land prices increase
In this section we examine land prices increases, because between 1970 and 1995 a
significant rise in land prices was recorded in both zones of the study area. A land prices
index monitoring possible fluctuations over an extended time period similar to the one
encountered in this study is non-existent. The method used to identify the evolution of
land prices is based on the Assessed Value Method (Clapp and Giacotto, 1992; Hoesli
& Thion, 1994) and uses the deflated prices of the transactions. Changes in the volume
of transactions (Figure 5) and the rate of evolution of land prices (Figure 6) show that
generally, the increase in prices is more evident during periods of increased numbers of
sales. It is not easy to depict prices’ increase, especially due to the high inflation rates,
the financial instability and the continuous devaluations of the national currency after
1972 and especially after 1985. However, from 1980 to 1995, when tourist activities had
started to intensively spread across the area of study, Zone A experienced an increase
in the price per square metre of land suitable for construction from 16 €/m² to 47 €/m².
Over the 15-year period, the average land prices in Zone B increased from 10 €/m² to
34.5 €/m² (in constant prices).
As already mentioned, for Gaffney (1994) speculative action is when one is buying a
real estate asset with the expectation of holding it until the value has increased, with the
intent to sell it subsequently, without making any investment in it. This is a rather narrow
definition because it limits speculation to the resale of the acquired land, and reduces
land speculation almost to a break-even point in property accounting, and it excludes
the actions of any agents. If space and land markets are a part of a matrix in the
perpetual structuring and adaptation to internal and external interactions, shaped by
culturally, historically, socially and economically embedded institutions, as they are
approached in this study, speculation merits a wider consideration. Alfred Marshall
(1890, V.XI) acknowledged that the distinguishing features of land are the capitalisation
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231
of externalities, institutional factors, public goods, land tenure modes, property rights
and legal regulations, when access to spatial externalities is competitive and resources
are scarce. Then the market price of this access is measured in land rents and site
values.
The land market on the island and the broader area of study is characterised by a
limited supply of land, this in turn leading to a scarcity of land suitable for the
development of tourism facilities. This scarcity has been observed both at regional and
local level, and may be traced mainly to land ownership structure, planning regulations
and the spatial configuration of the tourism development of the island.
Most of the upper-class hotels and other tourist facilities are concentrated along the
north-eastern coast of the island of Rhodes, where our study area is located, mainly due
to the existence of the best quality beaches, cultural resources and transport
infrastructures, as well as geographical determinants. Hotel-enterprises located in
privileged natural sites endowed with local public goods and tourist facilities, minimise
the risk of survival (Cazes, 1989). The concentration of facilities led to the appearance
of urbanisation economies and externalities in the study area of Faliraki. As a result,
during the period of intense development 1980-1995, hotel capacity increased from
3,200 beds to 10,200, while occupancy rates of hotels were among the highest when
compared to other tourist areas on the island, according to data provided by the Greek
National Tourism Organisation for the period of study. Thus, competition among buyersenterprises for the acquisition of privileged plots, in areas that are well established in the
international tourist package system, as is the case with our area of study, was very
intense. Moreover, within a distance of 50 kilometres from the city of Rhodes – which is
the unique tourist entrance point and the major site of tourist attraction – large coastal
plots suitable for hotel development are scarce. Most of these plots are under the
Ministry of Defence ownership of the Greek National Tourism Organisation;
consequently they remain unmarketable.
On a local scale, there is a ‘structural’ lack of land plots suitable for development; this
fact diminishes the total quantity of space and generates inelasticity in land supply. The
main reason behind this lack of land plot availability is related to the land property
ownership structures in the area of study and to the tax regime in effect. In Rhodes
Island, and within our area of study, for historical reasons the land property structure is
characterised by an increasing phenomenon of extensive land fragmentation and coownership. The average numbers of co-owners per land plot in the study area increased
from 2.49 in 1965 to 4.3 in 1995. The average size of plot-ownership is limited, while, as
time elapses, the average plot size diminishes. Based on the available data, in the
1965-1995 period, the number of plots increased by 13%, while their average size
decreased by 18%. Only plots of a larger surface than 4,000m² are constructible, while
since 1991 land plot surface suitable for hotel development was fixed at 10,000m² 1 ; this
1 Government Gazette No 474/D/1991.
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Nikolaos Triantafyllopoulos
corresponds to only 37% and 22% respectively of the land plots existing in the area in
1965, according to our cadastral data. This tendency of limited availability of plots
suitable for construction is also confirmed by the limited number of land plots sold in
their entirety and the decrease in the average number of plots sold over time in Zone A,
while the increasing number of transactions confirms the strong demand (Table 1). Intergenerational transfer of family land property is the reason for this phenomenon. Due to
customary succession rules (inter vivo or mortis causa), property rights are distributed in
equal shares to all beneficiaries who become co-owners of the land property (reference:
the author). Heavy ad valorem tax, levied on every asset transfer, like inheritances and
donations, prolongs the lack of legal clarity surrounding ownership rights; in order to
avoid very heavy taxes (from 10% to 25%, plus administrative costs), heirs do not
arrange their property rights over many generations. As a result, in cases where there is
a need for transaction of property rights on land plots, the procedure becomes
particularly long and difficult; figure 5 demonstrates that non-market transfer acts have a
different cyclical movement to transactions. Moreover, landowners may not always be
willing to sell their land, for emotional or customary reasons, until there is an urgent
necessity to do so for emotional or customary reasons (Madjarian, 1991; Milner, 1993),
or even, because absentee ownership exists close to their property (Veblen,
1923/1997). Moreover, as long as landowners hold their property, they enjoy the capital
gains their assets yield due to the tourist development in the area. According to the tax
regime in effect, the revenue derived from the exploitation of rural properties is taxable,
but not the land-ownership itself. The existence of plots outside out of the market adds
to the inelasticity of the market supply during periods of strong demand and drives land
prices up (Fisher, 1988).
During the first period of the area's development (1965-1975), when the pioneering big
investments of strategic importance were realised, land demand stimulated the
arrangement of property rights. During the period 1976-1985, this tendency was
intensified. The number of transactions of full ownership on land plots remained virtually
stable, while the total number of transactions (including full ownerships and percentages
of property rights on plots) was reduced. The arrangement of property rights, through
inheritances and donations (Figure 5), led not only to the exploitation of properties
through the market, but also through investing on them. After the creation of the right
conditions, market forces were released during the period 1986-1990, when the number
of land plot sales increased noticeably, while the non-market transfers (donations and
inheritances) slowed down, before the decrease of both transactions and non-market
transfers during the final period of study, 1991-1995.
The development of the area took place without any urban plan; this scenario is
common in Greece, especially in tourist areas. Urban development either without urban
plans or outside their jurisdiction is allowed in Greece (Economou, 1997), while the
establishment of new land use plans is usually a particularly lengthy procedure. The
elaboration of the Master Plan of the area in question started in 1985 and was finally
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instituted in 1994 2 , while, since 2005, it has been undergoing a revision process.
Moreover, it should be mentioned that according to the Greek planning laws, the Master
Plan is just the first step in the urban planning procedure, as it only defines land uses
and traces networks of public infrastructure; in practice, the Master Plan does not allow
any rigorous control on buildings; this could be effective through the establishment of
the City Plan, which has never been instituted. Thus, as far as planning regulations are
concerned, our study area is almost homogeneous. Although non-urban areas are
constructible in Greece, there are particular building regulations for each building use building volumes, their foot print and height (Moniaros, 1976; Efthymiatou-Poulakou,
1994)- building controls were conspicuously absent. According to a 1994 Municipality
survey, about 40% of the buildings were constructed without any building license. Land
is substitutable in the sense that, when land is scarce and values are high, property will
be developed at a higher density, substituting capital for land (Marshall, V.XI.17). This
becomes possible when this is allowed by the ownership structure and planning
regulations, but this is rarely possible in areas where high buildings are not allowed, as
in this case in our area of study.
Land ownership structures, building and planning regulations as well as the tax regime,
have created conditions of restricted land supply. Moreover, market fluidity is
accentuated by the property transaction taxes applied in Greece. They were always
costly, as tax is levied at a rate of 11% on its market value, plus the other transaction
costs, which is a barrier to successive short-term speculation (Levin and Wright, 1997).
However, these conditions may confine – but they cannot eliminate – the reasons for
speculative behaviour of the agents present in space.
4. A speculative prices increase?
On the basis of Gaffney’s (1994) basic statement previously mentioned, land
speculation concerns the possibility of a significant profit on the “rent gap”. Smith (1979)
defines the rent gap as the disparity between the potential rent based on its “highest and
best use” and the actual rent of the land. Bourassa (1993), Clark (1995) and Hammel
(1999, p. 1287) criticize Smith, not without justification, as he equates capitalised land
rents, both actual and potential, with land price. However, as Marshall (1890, V.XI.4)
quite rightly points out, site value is determined when a piece of land is sold in a free
market, and it is quite different from ground rent (land rent).
The highly dissent concept of “highest and best use” is a key notion in the discussion
about the rent gap and is intrinsic to land speculation identification. For Smith (1979, p.
543), potential land rent is the opportunity cost of land, while Gaffney (1969) defines
2 Government Gazette No 721/D/1994.
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Nikolaos Triantafyllopoulos
potential land rent as “the highest latent opportunity cost of land”. Bourassa implies that
the highest latent opportunity cost of land is equivalent to the rent based on the “highest
and best use” of the land, and this represents “the maximum amount that the
leaseholder is willing to pay” (Bourassa, 1993, p. 1734). For him, the landowner aims to
collect at least the opportunity cost of the site, while for Hammel (1999) the asking
prices do not simply refer to the land’s ‘highest and best use’ for the land users under
the current conditions, but to the potential use due to changes over time and the
geographical scale of the area which, as expected by the landowner.
According to the urban economics theoretical premise initially perceived by Von Thünen,
land use is determined in the market by the ability of competitive users to pay the
highest opportunity cost of land. Thus, the most economically efficient land use occupies
space, when this is permitted by existing urban plans and regulations (Dotzour et al,
1990). In our area of study, the two competitive land uses are agriculture and tourism.
Consequently, tourism (in the form of upper-class hotels) sets potential land rents and
site values in the area, as it ensures higher returns.
For Marshall (V.XI.14), the capitalised value of any plot of land is the actuarial
‘discounted’ value of all the net incomes which it is likely to afford, allowance being
made for all incidental expenses, including those of collecting the rents, but also, for its
mineral wealth, its capabilities regarding the development of any kind of business, and
its advantages, material, social and æsthetic. Thus, Marshall implies that the capitalized
value incorporates all factors that may affect it, including environmental quality, at any
geographical scale of consideration.
According to Von Thünen and Marshall’s theories, the residual method of valuation for
hotel investments is the most common and appropriate method to determine the most
probable price that can be paid for a site; this is the Bourassa’s highest latent
opportunity cost. The residual method “is probably the best method for arriving at the
value of the site, as long as the valuer is aware of the variables used by the majority of
the active purchasers in the market at the time of valuation” (Harper, 2008, p. 171).
eeThe gross land value results from the likely future value of the completed
development, minus the costs of development, including the cost of money, any
operating costs and the developer’s profit. Subsidies are not considered, as they
abnormally distort the land value justified in the free market. The estimated future value
represents the sale price of a completed hotel development and is calculated by taking
into account the trading profile of the hotel, room and occupancy rates. Commonly, this
profile must ensure the maximum profitability of the investment. In the residual method,
expected revenues and profits from rooms are of decisive importance. The capitalisation
of the approximate measure of the hotel's operating cash flow (income capitalisation), as
expressed by EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation)
gives the gross value of the hotel (PFK Consulting, 1996; Harper, 2008). Logical
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235
reasoning suggests that hotel development costs must be proportionate to the expected
hotel revenues.
On a location with the benefits of an attractive physical environment, externalities and
situation rents (in the sense of Marshall, V.XI .3 and 4), it is rational to create the
adequate standards hotel, thus ensuring maximum room rates and potentially maximum
returns. Then, if hotel development ensures the maximum returns, this represents the
maximum amount that the user of land is willing to pay, and that is the highest and best
use of the site in economic terms, according to Bourassa.
Although residual method is theoretically supported, it requires a large array of
assumptions (Verginis and Taylor, 2004; Harper, 2008) and connects the rather abstract
concept of potential rent with a future value from which land value derives. This could be
a methodological fallacy, if in this case land values would not be equated with the real
land prices registered over the period of study.
Land price increases probably make no sense when they are not correlated to the
fundamental value of the final product of the considered land in question. The notion of
fundamental value is defined as the present value of the future cash flows associated
with the use of a particular asset. As mentioned before, in the case of hotels, future cash
flows are strongly associated with the room and occupancy rates, as well as costs,
which are determined by the local and even the international market, as far as room
rates in mass tourism areas are concerned. The deviation of market prices from
fundamental values, for an extended period of time, is usually attributed to overreactions or the rational expectation of speculative prices (Camerer, 1989; Lavin and
Zorin, 2001). Data referring to the price of land plot transactions and the rates for
double-bedded rooms in upper class hotels, as occurring in prime coastal locations
within the area of study, demonstrate the increasing price divergence between the raw
materials for tourism real estate development, i.e. land, and the final hotel-product in the
area (Figure 6). As an example, we cite that in 1973, the price of land plots near the
seashore was around 1 €/m², while the double-bedded room rate was 1 €/m² per night.
In 1995, in the same area, the price of land was three times the room rate. As land value
is a geared residual of overall value, the crescent divergence between the two series of
prices indicates that the evolution of land prices in the area seems to be independent of
the hotel investment returns, which in turn largely depend on room prices.
Bourassa (1993, p. 1734) accurately states that “when actual rent does not approximate
to potential rent, that implies that: (1) the site is being held speculatively in anticipation
of future development or sale; (2) some kind of subsidy or other adjustment is involved,
or (3) the parties to the lease miscalculated the site’s potential rent”. Our case study
suggests that the actual rent is higher than the potential rent. Potential rent represents
the highest and best use of the site, while land speculation concerns actual rent. This
case occurs when the leaseholder and the land owner calculate the expected
profitability of the potential investment on the site, due to the existence of state
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Nikolaos Triantafyllopoulos
subsidies and other financial arrangements for business, as discussed in the following
section.
5. Tourism sector financing system
Since the 1960s, the incentive of the governing agencies has been to stimulate the
economy towards quicker recovery, through regional development subsidies and
expansive monetary policy (Hondroyiannis, 2002). This has stimulated tourism
development but in many cases at the cost of some sectors, such as hotel development.
The regional development policy and bank credits have ensured the financing of the
tourism sector for a long time. The hotel-financing system was closely related to real
estate.
From the beginning of the ’50s until the early ’90s, the Greek economy has been an
overdraft economy. Financing was undertaken by the Bank of Greece, via bank loans to
those sectors of the economy considered to be a priority for development. Until 1982,
the Monetary Committee of the Bank of Greece dictated the financial policy that the
Bank had to operate under. Due to this particular jurisdiction, the Bank was in a position
to directly control the creation and management of the portfolios of commercial banks.
These, in turn, were highly dependent on the Bank of Greece, which controlled their
financial expansion. From the late ’50s until 1990, real interest rates were much lower
than the rate of inflation (CPER, 1991). Despite the low interest rates and lack of
alternative investment products, rates of private savings and inflation were high until
1995 (Figure 7) (Voridis et al, 2003). High savings, particularly during the period 19711990 (Hondroyiannis, 2002) ensured the system’s high liquidity, which in turn benefited
borrowers (Panagiotopoulos, 1984). One of the largest borrowers was the state, which
had appropriated available funds through the banking system to exercise – among other
things – its regional development policy.
Through the measures to motivate regional development, the state allocated a
considerable sum of money to the creation, development and renovation of tourist
enterprises. State capital subsidies and subsidies of interest rates have been particularly
generous in the area of study. Act No 543/1968 recognised substantial subsidising of
tourism entrepreneurship. The capital contribution from individual entrepreneurs was as
low as 20% of the investment, which included the value of land where the enterprise
was to be established. Act No 289/1976 allowed subsidies as high as 85% of the total
hotel investment. The aim of the law was to promote the development of bordering
regions in danger of depopulation, following the crisis in Cyprus with Turkey. Act No
1262/1982 set the contribution of the entrepreneur at 35% of the investment, while the
state subsidy was 27.5%. The remaining 37.5% was covered by bank loans, whose
interest rate was also subsidised. Land value was included in the aggregate cost of the
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
Land Speculation and Property Market (In)Efficiency
237
investment, which was subsidised. The entrepreneur’s contribution was still low. The
application of the previous Acts had further effects: individuals that were not related to
the tourism industry became involved in the hotel business by utilising their land
ownership; thus it strengthened the concentration of tourism enterprises in alreadydeveloped areas, such as Faliraki. Act No 1892/1990, which was effective till 1998, was
less generous. Its declared objective was to obliterate the negative effects of the
previous Acts. State subsidies to capital invested carried an interest rate of 25% and the
individual contribution was 40%. The value of the plot was not included in the total
investment cost, but it was considered as invested capital.
Apart from state subsidies, funds used to develop the tourist industry came from a
limited number of state-owned banks. Long-term borrowing was monopolised by stateowned financial institutions, until the late ’90s. Since its establishment in 1964, the
Hellenic Bank of Industrial Development (HBID) has issued the 80% of the loans to
tourism enterprises in Rhodes, as evidenced by mortgages registered in the cadastre.
The National Bank of Greece, the Ionian Bank of Greece and to a lesser extent the
Mortgage Bank of Greece were the other financial institutions that issued similar loans.
Private banks issued only short-term loans of limited amounts. When the Ministry of
Finance subsidised a tourism development project, it was assumed that this
entrepreneurial activity was guaranteed by the state and banks were willing to support
the project. Up to the end of the ’90s, state-owned bank borrowing was easy. The
paradox lies in the fact that, although the guidance of the Monetary Committee was
strict in controlling the portfolio management of the private banks, through a complex
system of rules, state-owned financial institutions enjoyed the complete freedom of their
credit policy (Chalikias, 1976).
The basis of credit for hotel-enterprises was not the marginal productivity, but collateral
security on land and buildings. Lenders were not concerned with the productive use of
their loans and the development prospect of the enterprises (Vranopoulos, in Karatzas,
1981). For the creation of new tourism enterprises, no reliable feasibility study has ever
been drafted, except for the standard form the Ministry of Finance required prior to any
subsidy authorisation. In reality, even the criterion of real guarantees was never
respected. Opportunities for easily-achieved profits based on state subsidies and the
financing system motivated locals who had no prior experience in the hotel business to
find ways to take advantage of their land ownership, instead of concentrating on the
creation of competitive enterprises. A number of newly-established enterprises were not
viable and required continuous borrowing to ensure their survival. Undoubtedly, there
were entrepreneurs who invested their capital following a thorough investment plan.
However, there were a number of entrepreneurs operating who did not possess the
appropriate funds. They would buy a plot of land, receive state subsidies and mortgage
this land many times so as to borrow considerable sums of money. Taking advantage of
fierce competition among international holiday destinations, international tour operators
exerted pressure for price reductions in hotel services. In such an environment, the
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Nikolaos Triantafyllopoulos
quality of services of many enterprises declined (Loukissas and Triantafyllopoulos,
1997). Very often hotel owners were not in a position to fulfill their obligations towards
the banks, while some others were little concerned about the consequences. Highlyindebted enterprises were constantly borrowing, as proved by cadastral registrations of
mortgages. That was a common practice, assuming an enterprise did not fall behind
with its obligations towards the lender, to secure loans without any difficulty. The fact
that the assets of enterprises were mortgaged for sums much greater than their actual
value wasn’t a barrier to new borrowing. Cadastral registrations also show that a
number of enterprises received important loans, while their assets had already been
declared confiscated by the same bank. As Boot (2000) recognises, a borrower on the
verge of defaulting may approach the bank for more credit to forestall default, while a
bank that has already loaned money may decide to give further credit in the hope of
recovering a previous loan. The question is that borrowers who realise that they can
obtain an additional loan or renegotiate their credits ex post may have perverse
incentives ex ante, and thus, they may exert insufficient effort towards the prevention of
a bad outcome. The assets of small and large enterprises are substantially burdened
with high mortgages (HDID, 1996, p. 10). Conclusive evidence based on the cadastral
data analysis regarding the value of debt incurred by enterprises in Rhodes cannot be
drawn, but there is cadastral evidence supporting the fact that in 1995, based on a
sample of 45 hotel enterprises, 28 of them (representing about 65% of the hotel-beds in
the area) were heavily indebted 3 . The decision as to whether a bank should lend to an
enterprise or not, was taken by the headquarters of the Bank in Athens, based on a
report submitted by the local branch. Usually banks have developed close relationships
with borrowers over time, as this helps them to overcome problems of asymmetric
information (Bhattacharaya and Chiesa, 1995). Moreover, networks of social relations
and personal contacts between bank managers, individual entrepreneurs and their
intermediaries assist towards the issue of a loan; however, the importance of network
structures in the organisation of financial markets is significant (Uzzi, 1999; Lapavitsas,
2007). In our case of study area, due to the fact that the lenders were state-owned
institutions, with no effective restrictions, the decision to lend to an enterprise was often
the result of the network relations or even the political pressures exerted.
The aforementioned practices led credit banks to ‘adverse selection’ (systematic
advance of funds to poor-quality projects) and ‘moral hazard’ (significant fraud or
cheating) by the lenders. Over-lending to heavily-indebted enterprises led to the creation
of an unhealthy entrepreneurial environment. The state-owned bank lenders
permanently face a ‘prisoners’ dilemma’: should they cooperate by continuing to finance
indebted enterprises, or not cooperate and confiscate their assets? However, if these
enterprises were confiscated, it would be difficult for the bank to operate them in a way
so as to achieve profitability. Even auctioning assets usually yields only a fraction of the
3 In 1993, about 46% of the hotel-enterprises in the Aegean islands were over debt (Rhodian newspaper
Dimokratiki, 5/11/1993)
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
Land Speculation and Property Market (In)Efficiency
239
outstanding loan. The banks, which were state-owned and controlled, could not allow
the large mortgages to be wasted through confiscation and at the same time create
irreparable socio-economic damage in Rhodes; tourism is the main source of income on
the island. At regular intervals, the solution was provided by the government itself, as
the interests were capitalised or new bank loans were negotiated so as to secure the
continuation of financing to the enterprises. This was, to a high degree, the result of
pressures exerted by local deputies or Ministers 4 .
Thus, while the cooperation of the different agents of sector financing leads to a Paretoefficient equilibrium, as Elster (1989) has shown for oligopolistic markets (cited in
Beckert, 2002, p. 298, note 22), the aforementioned socially constructed relationship of
trust underpinning credit transactions is transformed through political ways and social
networks into a deficient practice of the financial institutions, and leads to a non-sum
zero ‘game’ and consequently to a Pareto sub-optimal situation of credit market
(in)efficiency.
6. Concluding discussion
In “orthodox” economic literature, market actors are removed from social relations (Lie,
1997; Zafirovski and Levine, 1999). From an economic sociology point of view, public
policies, institutions and financial intermediations – as they are observed in the area of
study – can be understood as variables to explain the economic processes and spatial
structures being embedded in the economic context, where speculation holds a
predominant role regarding the active construction of social preconditions of both local
land and tourism infrastructure markets. Our case study area supports Evans’s (1995)
arguments about the importance of supply and government policies in relation to the
formation of land prices that could be raised to speculative levels. Under conditions of
limited supply of land for development, enterprises seeking sites had to pay land owners
a speculative premium for space. With generous state subsidies applying for a long time
in the area, stimulated development and induced higher percentage values were
capitalised into higher land values. Property users and land owners had taken into
account private costs generated by externality effects and acted as speculative agents
seeking profit, anticipating state subsidies and the bank financing opportunities.
Developing hotels and other tourist facilities in the already intensively developed area
had resulted in increasing costs, which in turn led to the diminution of the real
investments returns, and consequently to a credit forestall feebleness. Thus, speculation
4 As an example we cite that in February 1993, 50 indebted hotel-entrepreneurs visited the Prime Minister in
order to demand his assistance (Rhodian newspaper Proodos, 25/2/1993). The same has bad occurred about
one month later (Proodos, 24/3/1993), just some days before the opening of the hotels for the new tourist
season, and again two years later (Proodos, 28/1/1995)
Discussion Paper Series, 2010, 16(10)
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Nikolaos Triantafyllopoulos
in the tourism financing system was transmitted to land market and transformed to land
speculation, accommodated by the permanent conditions of limited supply of land.
This study privileges space and the Marshal’s idea that “man is the center of every study
aiming at understanding society” (Aspers, 1999, p. 663) than the neoclassical economic
approach of market efficiency. According to Beckert (2002, p. 294), “the bases of
efficiency are constituted in the action process itself. The limitation of the market as a
presumption of economic processes is a contingent result of social action”, while
Granovetter (1985), suggests that the patterns of relationships among actors are the
core variable for the explanation of economic outcomes. Mises’ dictum of ‘human
purposefulness’ (Mises, 1949/1996) and the concepts of ‘bounded efficiency’ and
‘efficiency for a person’ (Keogh and D’Arcy, 1999) could be placed within the economic
sociology context, for which “any situation has several readings which can be judged as
adequate responses by the actor” (Beckert, 2002, p. 290). It may be adequate, when
considering speculation, rationality of the actors and property market efficiency, to avoid
focusing on the identification of an optimal strategy, but, instead to focus, on the
understanding of intentionally rational economic actions that have an individual
meaning. Market agents adopt speculative action based on their past experience,
cultural traditions, present and future expectations, and their ‘best guess’ as to what
might be ‘optimal’, for their personal, family or business welfare; they learn by receiving
positive or negative reinforcement of their outcomes (Lo, 2004). In this fashion, as long
as their challenges remain stable, individuals develop heuristics to face various
challenges. But space and general environmental change, and therefore heuristics,
eventually adapt to yield approximate optimal solutions as perceived by them (Bronner,
2001). Rather than labelling the behaviour of market agents as simply ‘rational’ or
‘irrational’, it could be asserted that sub-optimal behaviour is to be expected, when one
takes into account the evolutionary spatial, personal, social and economic contexts of
their action. By coupling this with Simon’s notion of bounded rationality, many
adaptations may be designed to address challenges for actors. One can assert that, if
land speculation is considered only from an individualistic point of view, it can be
regarded as a socially–embedded, rational economic action, maximising individual
gains. But when land speculation is a conducted in the absence of a rational global
motive emanating from state policies to a large extent, then it leads to an overall
inefficient property market, producing pernicious effects to activities and space.
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
Land Speculation and Property Market (In)Efficiency
241
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WEBER, M. (1925/1925) Economie et société: Les catégories de la sociologie, (Vol. 1), Pocket,
Paris.
ZAFIROVSKI, M. & LEVINE, B. (1999) A socio-economic approach to market transactions,
Journal of Socio-economics, 28(3), 309-334.
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
Land Speculation and Property Market (In)Efficiency
245
Appendix
Table 1 : Data on land market evolution in the study area (1965-1995) Data on the 393land plot sample
Zone A
Total number of sales
Full ownership on land plots sold
Average size of plots sold (m²)
Zone B
Total number of sales
Full ownership on land plots sold
Average size of plots sold (m²)
1965-75
1976-85
1986-90
1991-95
10 years
10 years
5 years
5 years
101
80
140
74
17
16
36
34
5,480
4,949
3,531
2,468
1965-75
1976-85
1986-90
1991-95
51
73
107
95
9
10
40
37
3,199
2,073
4,959
2,271
Primary data source: Cadastre of Rhodes
Discussion Paper Series, 2010, 16(10)
246
Nikolaos Triantafyllopoulos
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
Land Speculation and Property Market (In)Efficiency
247
Discussion Paper Series, 2010, 16(10)
248
Nikolaos Triantafyllopoulos
Figure 2A : Percentage of land plots in the area of s tudy in
relation to the whole area of the community.
100%
90%
80%
70%
60%
50%
40%
30%
20%
remaining community a rea
Faliraki
10%
1995
1993
1991
198 9
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
0%
primary data source: Cadastre o f Rhodes
Figure 2C : Evolution of the land plot sales within the designated area of
study and the sales of the 393 land plot sample.
70
sales of the 393- land plot sample
60
total number of sales
number of sales
50
40
30
20
10
prima ry data source: Cadastre of Rhodes
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
1995
1993
1991
1989
1987
1985
1 983
1981
1979
1977
1975
1973
1971
1969
1967
1965
0
Land Speculation and Property Market (In)Efficiency
249
Discussion Paper Series, 2010, 16(10)
250
Nikolaos Triantafyllopoulos
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
Land Speculation and Property Market (In)Efficiency
251
Fig ure 5 : Trends of market and non-market transfer acts evolution
du ring the period of study
40
30
transactions
number of acts
inheritances
donations
20
10
1995
1990
1985
1980
1975
1970
1965
0
primary dat a source: Cadastre of Rhodes
Figure 6: Rhythm of price evolution of land plots per m2 in Zone A
in Faliraki, and double room prices in class A hotels within the zone
A. (use of constant prices)
900
800
land prices
700
hotel prices
600
500
400
300
200
100
0
1970
1975
1980
198 5
1990
1995
Discussion Paper Series, 2010, 16(10)
252
Nikolaos Triantafyllopoulos
Figure 7 : Long term credit rates of interest, s avings deposits rate (annual
averages) and General Consumer Index
32
28
24
20
16
12
8
4
credit i nterest rates
savings deposits
0
Genera l Consumer Index
source : Bank of Greece
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
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