Speculation

Speculation and speculative investments may occur when valuables are held or sought for future sale or purchase, respectively. Speculation and speculative investments may also occur when valuables are held or sought for a shorter or longer time than originally anticipated. Valuables can be securities, foreign currencies, commodities, pieces of art, land, and real estate, among other things. The goal is to obtain the maximum profit (i.e., a favorable difference between the purchase price and the sales price). Timing is of great importance. A purchaser-investor or speculator-investor may believe that the future value of an item will increase, although there is a risk that the expected appreciation will either not happen at all or only happen much later than anticipated. Similarly, a seller-investor or speculator-investor may believe that the future of a valuable will decrease, although this may not occur or may occur at a different time than anticipated. The risk of a transaction may be volatile, but there is a positive relationship between risk and return: The higher the risk, the greater the rate of return, including a high likelihood of loss. Speculators can be individuals as well as corporations. Speculation is different from hedging and arbitrage. Hedging is the practice of reducing risk by offsetting the exposure to price changes or fluctuations, while arbitrage is the generally risk-free practice of taking advantage of a price difference between two or more markets.

On a theoretical level, land and building speculation have been primarily discussed in the literature that provides an alternative to neoclassical economics and urban ecology. For example, reformer Henry George (1839–1897) argued that private property in land in general and real estate speculation in particular causes the unequal distribution in wealth, along with poverty, among other things. Therefore, the economic rent of land should be owned and shared by society rather than being owned privately. Thus, George suggested the single tax, combining the value of land and buildings, which can be seen as a property tax on land but not on improvements. He argued that the single tax boosts the economy by encouraging work and capital investment, as labor income and returns on capital are not taxed, while discouraging landlordism, the underutilization of land, and speculation, as the property tax is relatively high.

Real estate speculation may occur when investments in other productive areas do not generate a profitability deemed sufficient by the speculator investor or when there are negative changes in profitability. Land speculation is likely to happen when [Page 699]highest and best use exists, and thus, the potential maximization of profit has not yet occurred. According to the Appraisal Institute, highest and best use may be defined as “the reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value” (Appraisal Institute, 2001, p. 305). Although the highest and best use might be difficult to predict exactly, it can often be anticipated and possibly estimated through an analysis of the adjacent local zoning and land use patterns or the local and regional comprehensive plan.

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