2. A large amount of floor space has been developed where there is little demand for it, that is, in the suburbs with less accessibility. When transport subsidies are progressively removed and full wages restored, demand -- and consequently land prices -- for this type of high density housing far from the city center will drop even further. Prices could well drop below replacement costs and trigger abandonment.

3. The fully-serviced, underused land close to the city center has a high opportunity cost.

# **IH.** EMERGING PROPERTY MARKETS **AND REAL ESTATE** PRICES

For seventy years, Soviet Russia has used its great natural resources to built an urban system of doubtful efficiency and sustainability. More generally, the socialist city has inordinately high capital/output ratios and requires more resources for less urban output that market cities. Urban land markets are therefore a very important part of overall economic reforms. The allocation of land should be driven by its current opportunity cost. However, the value of a specific land parcel in its highest and best use can prove difficult to estimate even in a stable fully developed urban land market. The next best prices are actual market transactions which are the result of private valuation of investors looking at the future _and risking their own-resources._ Since 1990, urban laws and constitutional reforms promoting individual ownership and decisions have been enacted in Russia (Butler and O'Leary, 1994), as well as other socialist countries, including China (Kerzner 1993). Consistent with Kornai's insight (1990), such reforms were initially attempted for narrow bureaucratic reasons.

# A. **Synthetic Land Price Gradients and Normative Prices**

During the late 1980's, under Gorbachev's _perestroika,_ local governments resources had become severely constrained. Local mechanisms to finance the production of serviced land had to be found to complement the inadequate resource transfers from the central government. It was therefore decided to create a land use tax to finance local infrastructure. In the peculiar logic of an administrative-command system, officially land has no value in construction projects. Yet everyone agreed that different locations have very different economic values. The solution chosen was to estimate normative land prices on which taxes could be based. For the first time, various research institutes began building models to calculate synthetic land price maps according to which taxes would be raised, and from which land price gradients could be derived. These institutes have attempted to map normative values of land calculated on the basis of weighted coefficients representing amenities such as transport, infrastructure, environmental quality, etc. Typically, demand factors were not included, and price estimates were based on the arbitrary and highly distorted accounting prices of the late 1 980s. Regardless of these fundamental flaws, land value maps were produced from which one can infer a city's normative, land price gradient.

The resulting normative land price gradients of Moscow and St. Petersburg were negatively sloped. Moscow's gradient was somewhat flatter than St. Petersburg. The normative price variation between the center and the periphery in Moscow was only 2.5 to I (from Rb 4,000 at km 0 to Rb 1,600 at 22 km in the now irrelevant 1990 prices). Both curves are much too flat. In market cities, 9