Let us begin with agricultural/primary production on land. The rent charged consists of absolute rent and differential rent. Both arise on the basis of surplus profits on this production compared to the average annual industrial rate of profit. The former arises because, on average, all such production produces these surplus profits, i.e. market prices exceed price of production, the latter because certain lands produce even greater surplus profits than others. Having thus determined the amount of rent, the price of land is only the capitalised value of the rent. If the amount of rent rises, the price of the land rises, and vice versa, and, similarly, if interest rates fall, the price of the land rises, and vice versa.
There are a variety of reasons as to why rent might rise. The average industrial rate of profit may fall, so that surplus profit in agriculture/primary production rises relative to it. That would tend to cause industrial capital to seek to migrate to agricultural/primary production in search of these surplus profits, raising the demand for land, and enabling landlords to charge higher rents. Agricultural/primary product prices might rise, due to an increase in demand, causing surplus profit to rise, and an increased demand for land. Assuming interest rates remain constant, this would result in higher land prices.
Its worth restating what Marx says about these higher (or lower) land prices, in Capital and Theories of Surplus Value, as its also important when considering house and other property prices, as part of analysing these other types of asset. Marx notes that if rent on land that is being cultivated rises (and consequently the price of that land also rises), this does not only affect that cultivated land. It also determines the rent (price) of equivalent land not currently being cultivated. In other words, if there are two adjacent pieces of land A and B, each with the same level of fertility, and A is cultivated but B is not, then, if the price of A is £1,000, the price of B will also be £1,000, or put another way, if the owner of B were to let it, the rent would be the same as that on A.
That is because the rent is determined by the amount of surplus profit. If agricultural productivity remains constant, but the demand for agricultural products increases, so that a sufficient demand for production requires land B to be brought into cultivation, the surplus profit on this land B will be the same as on land A, and so the actual rent charged for land B, will also be the same, the difference now being that although the rate of rent remains constant, the amount of rent obtained by the landlord will double, because twice the amount of land produces rent.
If you look at house prices, estate agents, when valuing a house, start from the prices that identical, or similar, houses have actually sold for. That is why, at a time like this, when mortgage rates are rising, as a result of rising interest rates, the amount that buyers are prepared to pay for a house falls sharply, because what they can pay, each month, is more or less fixed, and it now represents a much lower value of mortgage. So, the selling price of houses falls, but its not only the houses that are sold that falls, but also that of all similar houses, whether their owners seek to sell them or not.
That is why, as I have set out, elsewhere, the argument that its only when mortgage rates reach levels that cause forced selling that house prices fall, significantly, is wrong. If buyers can only offer 50% of current prices, so that the prices of sold houses drops significantly, this will also be reflected in the valuation of all other similar houses, and, when the owners of those houses come to re-mortgage, or negotiate new fixed rate mortgages for their houses, they will find that it is these new, much reduced valuations they will be presented with, often requiring them to significantly increase the amount they must contribute in cash themselves. In other words, if someone had a £100,000 mortgage on a £100,000 house, when it comes up for negotiation of a new mortgage, and the house is now valued at only £80,000, whilst the outstanding mortgage remains £100,000, they will be required to put in £20,000 of cash, themselves, with the bank giving them a mortgage of just £80,000.
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