Externalities of Urban Renewal: A Real Option Perspective

If carefully planned, urban renewal may play an important role in regenerating a decaying neighborhood and mitigating the negative externality generated by dilapidated buildings in densely populated areas. Despite its potential benefits, in urban areas dominated by high-rise developments, urban renewal has an unintended negative impact on nearby properties since it reduces their redevelopment option values. In this study, we develop a number of hypotheses on how an urban renewal project, once made known to the public, affects neighborhood housing prices and test them with data in Hong Kong. Our empirical findings suggest that the degree of positive externalities brought by urban renewal depends on the scale of an urban renewal project, as well as the amount of commercial areas included in the project. Most importantly, through examining changes in the age coefficient, we found that an urban renewal project reduces the value of nearby buildings beyond the boundaries of the project. The negative effect was stronger for older buildings and for those buildings located closer to the project's boundaries. These unintended consequences of urban renewal have not been analyzed or tested in previous studies.