Although Ricardo was quite correct, he explained his Theory of Rent in such a clunky fashion (using agricultural land to illustrate the point) that it's easy for the Faux Lib's and Homeys to attack (they are attacking the explanation, not the underlying observation, but there you go, some people easily confuse the two and have no grasp of analogies).
It turns out that the far more relevant explanation is Von Thünen's, as he factors in travel/transport costs, a model which applies much better to a modern, industrial society where the qualities of the land itself are nigh irrelevant and everybody faces the same two basic constraints - local average earnings and commuting times.
Caveat 1: The costs of transporting actual consumer goods are relatively low in the grander scheme of things, and the price of consumer goods are pretty much the same all across the country (higher rents in town centres are because a retailer can sell more goods per unit area; not because he can sell for higher prices).
Caveat 2: Travel time is not the same as distance as the crow flies. Door-to-door is what counts.
Caveat 3: The basic model assumes that all homes are of the same size. Clearly this is not true; in the same way as people as people are prepared to pay a bit more for shorter commute times, they also prefer more space to less space. So the price gradient for "an average home" is not as steep as calculated in 3. below, because the other trade off is between living in a flat in the town centre; a terraced home in the inner suburbs; a semi-detached home in the outer suburbs or a detached house out in the countryside. This flattens off the price gradient on a per-home-basis, but the gradient is still maintained on a per-land-area basis so e.g. for the same area of land, in the town center there are five flats for £100,000 each; in the inner suburbs there are three terraced houses for £170,000 each and in the outer suburbs there are two semi-detached houses for £250,000 each.
Caveat 4: There are lots of other things which explain local differences, such as being near a public park; in the catchment area of a good school and/or being nearer the school; having a nice view; being near the coast - but let's put those to one side for now, that's a simple plus/minus adjustment once we've done the basic workings.
1. The first constraint is local average wages. If you look at average rental values (in terms of actual rents or selling prices) for whole conurbations/regions, they are closely related to average (net) wages, which is blindingly obvious. If average worker can earn £1,000 a year more by moving from A to B and doing the same job, then average rents in B will be £1,000 higher.
2. Then commuting costs make up a huge share of GDP, if you express them in terms of hours x notional cost/value per hour. For example, average commute time 45 minutes and people value their own leisure time at £10 per hour, (or could earn £10 an hour by doing overtime, or they value their leisure time at £8 and commuting costs £2/hour etc), for one person the "cost" is 7.5 hrs/week x 48 weeks/year x £10 = £3,600.
There are 30 million workers in the UK, 30 million x £3,600 = £108 billion a year, approaching ten per cent of GDP.
3. So if everybody in the whole conurbation/region was on exactly the same wage, the gradient between the center and somewhere half an hour further out would be £4,800 per hour, capitalised at 4% = £120,000 on the price of an identical sized home/garden. But see Caveat 3 above, whic
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