KEY POINTS:
Whether the missus - or the hubby - likes the house is the most powerful component of a newly identified X factor influencing the price of farms.
In its latest Rural Report, released yesterday, the National Bank said the price of rural land was described as its economic
value plus the X factor, a nine-part measure often greater in value than the economic value.
"The X factor collectively describes the intrinsic value of farm land," said the bank's rural economist, Kevin Wilson.
The most powerful part of X is the H factor, or what the house is like, said Wilson.
"The positive multiplier effect on price is exponentially related to the rating that the wife/partner put on the house."
Other elements making up the X include how close to the mountains a property is, how big the view is from it, and "alpha", a catch-all for anything else that influences the price to be paid.
Wilson said there were several ways of measuring economic value, such as net present value - the future income stream minus the cost of generating it - and the similar internal rate of return.
But farm prices had been diverging from economic value, increasing the need to achieve capital gains to get a desired overall return from a farm upon selling it.
Wilson said that in the 1950s and 1960s cash returns from farming were about 4.5 per cent a year, while capital gains were 5 per cent.
More recently, the cash return had fallen to 2 per cent and the capital gains rate had risen to 18 per cent.
"Arguably the disparity between the cash return from farming and the capital gain being earned is as far out of balance as it has been in the past 50 years," said Wilson.
This was unsustainable, and suggested a correction to the economics of farming had to come from factors such as land values falling, cost reductions, productivity increases or better product prices not immediately being capitalised into higher land prices.
Wilson did not expect the value of rural land to collapse unless there was a three-year-plus economic shock.
But he said a "rebalancing" was needed and "nuances around the traps" suggested this might be around the corner.
While farm values were still on the increase, the rate had slowed, and the market had thinned.
X Factor Elements
* What is the house like?
* Is there irrigation?
* Where is it?
* How close are the mountains or a prominent hill?
* How big is the panorama?
* How reliable is production from the farm?
* Is there a water view?
* Alpha - A catch-all for everything else influencing the price paid.
Source: Rural Report, National Bank.