Factors Affecting the Price of Swedish Forest Land, 1965--1987 LARS HULTKRANTZ Swedish University of Agricultural Sctences, Department of Forest Economics, Umed, Sweden Abstract. A model for the determination of the price of forest land is estimated for Sweden from 1965--1987, when (except for a few years) private non-industrial forest owners could finance their holdings at a negative real after-tax borrowing rate. It is assumed that credit has been limited by the value of mortgage security, assessed independently of the price settlement. The estimated coefficients of the regression equataon are used for a calculation of the average real rate of discount of forest owners and the average value of amenities. The model also evaluates the effect of the temporary land price regulation from 1979--1987. Key words. Amenity value, capital income taxation, forest economics, land market, price regulation, real estate. 1. Introduction Forest production is a dynamic business, so the opportunity cost of capital plays a crucial role both in management decisions and in assessments of the value of forest land. In both cases, economic analyses are often based on calculations of the discounted present value, assuming that the forest owner has access to a perfect credit market where he can lend or borrow without limit and at a positive rate of interest. Applied to the reality that forest owners in Sweden have been living with for decades, this simple framework breaks down. The net (i.e., after tax) real saving or borrowing rates relevant to most private non-industrial land owners were negative from the late sixties to the mid-eighties. According to the economic literature one could expect in some cases perverse effects of such a negative rate of interest on both the management and the pricing of land (i.e., undefined price and forest rotation periods beyond maximum sustainable yield rotation). However, at least it is clear from the Swedish experience that this situation has not led to runaway forest land prices. In fact, the anomalous behaviour predicted by theory is derived from the assumption that the credit market is both perfect (unlimited credit) and imperfect (negative interest). The theoretical results are substantially moderated when credit it close- ended. 1 In this paper, a simple model of forest land pricing is developed where a separation is made between the rate of discount of the forest owner and the borrowing rate of interest. Credit is assumed to be limited to (a fraction of) the value of the land as a mortgage security, which is assessed independently of the price settlement. 2 The model is estimated for forest land prices in Sweden from 1965-- En vzronmentat and Resource Economics 1: 373--384, 1991. 9 1991 Kluwer Academzc Publishers. Printed m the Netherlands