How Do Density Ceiling Controls Affect Housing Prices and Urban Boundaries?
Posted: 10 Jan 2015 Last revised: 14 Jan 2015
Date Written: January 8, 2015
Abstract
This article investigates how density ceiling controls in a monocentric city with a stochastic population affect housing prices and the location of the city boundary. We employ a real options model in which each landowner owns one unit parcel of land and chooses the timing and the level of capital intensity for development of the parcel. The landowner incurs up-front development costs that are irreversible and thereafter receives stochastic urban rents. A tighter density ceiling control will extend the urban boundary and decrease housing prices. The urban spatial expansion problem will be intact, but the landowner will delay development when city population is expected to grow less rapidly over time or becomes more volatile.
Keywords: Capital intensity; Density ceiling controls; Development timing; Real options; Urban boundary
JEL Classification: G13; R52; R58
Suggested Citation: Suggested Citation