Analyzing the Myth of Land's Intrinsic Value and Identifying Investment Pitfalls

Investors often encounter a misconception that land has "intrinsic" value, meaning that no matter where the land is located, it is always valuable. Let me explain why this idea is wrong...

The belief that land has intrinsic value no matter its location originates from our human past, starting when we transitioned from nomadic hunter-gatherers to settled agricultural communities. Control over land enabled us to live peacefully, support our families, and thrive. Over time, this concept evolved into the conviction that land holds value.

Is land always valuable?

Land ownership has long been associated with a sense of security, which explains why real estate is fundamentally different from other forms of investment.

While you can purchase stocks, savings accounts, bonds, or commodities without any guaranteed return, everyone needs a place to live, and every home requires land. Thus, as long as there are people, real estate retains some value. However, this does not mean that all land is valuable. If no one wants to live in a particular location, the land there is worthless. Australia is dotted with abandoned towns — from Wittenoom in the northwest to Luina in the southeast, where the streets are overgrown with weeds and the land is left untouched.

Does land appreciate while houses depreciate?

A common and related misconception is that the value of land increases while the value of the houses built on it decreases.

The reality is that we cannot separate land from the houses. When we buy a property, we purchase the land along with everything on it, such as the house, garage, shed, swimming pool, and fence. These are commonly referred to as "improvements," and they are always part of the property's title.

Rather than depreciating, properties usually increase in value over time. When we claim depreciation on improvements, we are simply using an accounting method to gain a tax deduction. You only need to look at your insurance policy to see that the replacement value of your house increases over time instead of losing value.

Is a high land-to-house value ratio important?

Another misconception related to land is that we should look for a high ratio of land value to house value. While this may sound logical, it has no real connection to the actual need for land.

Homeowners have various types of households, which determine their need for or preference toward land. Couples with young children tend to prefer properties with a high land-to-house ratio because they want a large yard for their children to play safely.

However, childless professional couples may view land as a burden and value the house alone for its workspace and entertainment areas. Retirees, on the other hand, seek properties that are easy to access, low-maintenance, and secure. They might not want any land at all because it requires constant upkeep. Instead, they may prefer townhouses, villas, or duplexes with just a small courtyard rather than properties with large plots of land.

Land does not always have intrinsic value, and many buyers may actually prefer properties with less land.