Valuing the Redevelopment Option Component of Urban Land Values
Real Estate Economics, Forthcoming
59 Pages Posted: 5 Apr 2016 Last revised: 24 Dec 2016
Date Written: December 23, 2016
This study draws from the redevelopment, real option, and urban spatial growth literatures to explore the spatial dynamics of the components of house prices. More specifically, the paper proposes that the capitalized value of the option to redevelop housing at the property level can be estimated by incorporating the likelihood of exercising the redevelopment option (the probability of redevelopment) into spatial and non-spatial hedonic house price models. Accordingly, option values are estimated for properties across the spectrum of the housing life cycle. Results from the study reveal a substantial level of spatial variation and clustering in the predicted option values, indicating that location is a major determinant of redevelopment and real option values. Furthermore, the results provide new evidence in support of the theoretical construct that properties purchased for immediate redevelopment are only valued for the underlying land.
Keywords: urban land values, redevelopment, real options, urban growth, spatial models
JEL Classification: R11, R14, R21, R31
Suggested Citation: Suggested Citation