A REPORT arrived on my desk last week from one of the national rural property consultants, which reminded me that farmland has increased in value by an average of 164 per cent during the last decade – making land ownership one of the very best ways of growing net worth over that time.

In simple terms, the reason for the rapid rise in land prices is that demand has outstripped supply. Given that farm profitability has hardly been spectacular during the last decade, one needs to reflect a little on why so many are keen to buy and so few are so keen to sell.

Decisions taken on buying farmland are rarely – if ever – taken for short-term financial gain. Indeed given the very low return on capital invested in most farmland, in practice where farmers borrow money to buy land the profit of their overall business is often reduced in the short and medium term, as the cost of servicing the borrowing is not met by the additional income generated.

So why do farmers take on such a seemingly dubious proposition and why are the banks prepared to lend? The second question is easier to answer than the first.

Any responsible lending decision should be based on an assessment of the borrower's ability to service the debt in question, that is to pay interest charges and eventually repay the debt. In practice, since this can rarely be achieved from the income generated from the new land purchase alone, the lending decision will be based on the total income generated by the farming business. Once a lender is satisfied that the new borrowing can be serviced, it will then look at what assets are available to secure the debt. In this regard the track record of farmland is second to none.

Despite the value of farmland as collateral for bank lending, borrowers should beware of the lender who only asks about the availability of security as the basis for a lending decision.

A responsible lender should be asking first and foremost about serviceability, since not to do so may lead to a borrower taking on more debt than is in their long term best interest.

I am occasionally asked whether banks are to blame for high land values, and there is often a strong implication in the way that the question is posed that high land values are a bad thing. The question is usually put by those keen to buy more land, but find that they are unable to do so.

Undoubtedly a high proportion of farmers who do buy land need the support of borrowed money, without which there is little doubt there would be less demand for land and prices would not have risen as much.

In most cases lending money to farmers to buy land has proved to be good business for the banks. Lending margins have been moderate but defaults on loans have been rare.

But has it been good business for farmers? In my view it rather depends on how you define "good business". If you look purely at short-term cash generation, since it is exceedingly rare for additional cash to be generated from newly acquired land until after the debt has been repaid, some commercial organisations would not consider that to be good business.

However if you look at the capital growth of farmland – 164 per cent over the last decade – then that would probably meet many people's criteria of "good business".

Is now a good time to buy farmland? The answer to this, as to many questions to do with farming finance, is "it all depends". It depends on why the land is wanted, what it will enable the farming business to achieve, and critically how the new land will be paid for.

I expect that we shall continue to see more demand for land than there will be supply and, as a consequence I expect land to continue increasing in value over the coming decade.

But capital growth of an asset, unless it is sold, which few farmers are keen to do, does not generate cash to pay interest charges or repay capital.

For those farming businesses where there is a sound reason for purchasing land and where the borrowing can be serviced, I would say now is a good time to buy. Where it makes sense for customers, financing land purchase continues to be good business for us too.