Kieran Coughlan: What the nitrates decision means for land prices
Stories still circulate of farmers who back in the 1970s and 1980s were able to pay for their land out of a short number of harvests.
Ireland’s land prices are on the up and perhaps at a more pronounced rate in recent years than has been the case for more than a decade.
There are a variety of factors which are leading to strong demand for land. Of course, there are the subconscious drivers stemming from centuries of subsistence tenancies where those who came before us were locked out of land ownership, the association of land ownership with status and the inalienable truth that to stand still in farming is to go backwards where absent of expansion a farm would become unviable.
These parameters continue to ring true but a host of relatively new factors has emerged which are affecting the demand side of the equation, such as flushes of money emanating from development land sales which have picked up again after a near decade of virtually no sales, the desire by those with wealth to pass on assets in a tax efficient manner, the advent of solar farms and those looking to acquire land for rewilding along with an increase in demand for afforestation.
The increase in land prices is in some respects a good thing, for those who own land it means their existing wealth increases, and from an economic perspective one might argue that land will be put to its optimal use in a market where there is strong demand and a finite supply.
It does seem, however, that land could have been bought, and the farming activity thereon would be sufficient to meet the repayments on it.
Stories still circulate of farmers who back in the 1970s and 1980s were able to pay for their land out of a short number of harvests, and while some of those stories might have grown legs and tails since then, there is some truth in numbers.
For one, the land prices were but a fraction of what they are currently. Average land prices in 1970 were sub £500 per acre, which seems incredulous when one thinks current annual rent for premium cropping land can almost touch an equivalent price.
After joining the EU, land prices rose rapidly, increasing tenfold over the following decade until the crash of the early '80s as recession in both farming and across the economy in general took hold.
Land prices dipped and continued to fall until the mid-1980s and it was the mid-90s once again before land prices began to gain significant momentum.
Land prices escalated from just over €3,000 per acre in 1993 to a high of €20,437 in 2007 albeit those prices should be taken in the context of development land sales and money derived from development land sales being recycled into land purchases during that Celtic era period.
Following the crash of 2008/09 land prices once again dipped to a low of €8,770 in 2010 and have recovered to a steady enough price of plus or minus about €10,000 per acre during the following decade.
These figures are extracted from the Smith Harrington Chartered Surveyors dataset published by the 2020 Society of Chartered Surveyors of Ireland Land Market Review.
The 2023 Land Market Review has predicted an increase in land prices of 8% for 2023, with that paper noting good land making €11,172 per acre in 2022, up 2% from the previous year.
Anecdotally, land prices have lifted significantly in the past two years, especially in areas where competition exists from dairy farmers. As interest rates rise, will this have a double effect on land prices?
Investors who may have been tempted to buy land and avail of income tax-free lease income with a return of 2%-3% might be swayed to leave their funds on deposit now that some deposit accounts are paying a higher rate of return at a potentially lower effective tax rate now that the tax-free leasing option is set to be removed for the first seven years of ownership.
For borrowers, interest rates on land loans have moved from sub 3% in some instances to rates close to 6% and with stress testing both in terms of interest rates and potential stocking rates should the nitrates derogation be further reduced.
With the nitrates banding results now known for 2024, it will be interesting to see how land prices will react depending on whether the parcel is located within an area which has additional limitations in terms of stocking rates or is excluded from those restrictions.
Will a two tier system emerge where land which can carry a higher stocking rate command higher rents than restricted lands?
Will farmers who are facing the prospect of reducing herd sizes continue to set the trend of higher land rents which will in turn support a strong land sales market?
The next six months will tell a lot as farmers decide what action they will take in the face of change.
