Residential Development, Risk and Land Prices
Posted: 13 Jul 1998
Date Written: Undated
The residential development sequence - land price relationship is the focus of this paper. Inherent in the dynamics of residential development is that the first consumers face the greatest risk since they do not know with certainty how the neighborhood development will evolve over time; subsequent consumers have more information. Is this risk priced? We develop a theory of land development that includes the effects of spatial externalities. The model predicts that land prices will rise over time relative to the market as the uncertainties of the residential development process are resolved and the neighborhood state is more clearly observed by subsequent consumers. Developers must offer the first consumers discounted land prices to compensate them for the first-mover disadvantage; subsequent purchasers pay higher prices for identical plots of land because the risks are lower. The empirical evidence indicates that this is indeed the case.
JEL Classification: R14
Suggested Citation: Suggested Citation