The Impact of Public-sector-led Urban Renewal Projects on nearby Housing Prices in Densely Populated Areas

Department: Real Estate and Construction
Research Centre: Ronald Coase Centre for Property Rights Research
Active Dates: January 2015 - June 2017

Principal Investigator: K.W. CHAU (PI), S.K. WONG (Co-I)
Funding body: GRF

Abstract

This study investigates how public-sector-led urban renewal projects affect the prices of housing units in the vicinity of the urban renewal project.

Besides the well-known positive external effect of urban renewal, this project also aims at examining its potential negative impact on nearby older buildings. We conjecture that, other things being equal, the prices of nearby older buildings that are not included in the public-sector-led redevelopment project are likely to be lowered. This is because a significant portion of the market value of an aged building is derived from its real option to redevelop. This value will decline if the building has not been included in a nearby public-sector-led urban renewal project. This study uses empirical data from Hong Kong to test the positive and negative impacts of these urban renewal projects on the prices of nearby housing units.

Objectives

  1. To investigate the positive impact of urban renewal projects on prices of nearby housing units.
  2. To review theory related to modeling a property’s real option value of redevelopment.
  3. To apply the theory reviewed in (2) to analyze the potential negative impact of urban redevelopment projects on prices of nearby housing units.
  4. To construct a dataset for testing the positive and negative impact of urban redevelopment projects on nearby housing price.
  5. To carry out empirical tests on the positive and negative impact of urban redevelopment projects on nearby housing price.
  6. To test how redevelopment real option affects the formation of housing prices in a high density urban area.

Experimental Work

The following model is estimated using transaction records of units within 200m of completed URA projects:

ln(RPt) = β0 + β1ln(AGE) + β2ln(GFA) + β3ln(FL) + β4T + β5T·COM + β6T·SA + β7T·ln(AGE) + β8ln( AGE) ·DD + εt

where

RPt = transaction price of a property in the vicinity of a redeveloped site, which is obtained by deflating the nominal transaction price by the relevant HKU-REIS price index at time t; AGE = the age of the property in years;
GFA = Gross Floor Area of the property in m2; FL= floor level of the property; T = dummy variable equals to 1 after the announcement of a redevelopment project and 0 otherwise; COM = commercial floor areas (in thousands of m2) of the redevelopment project; SA = areas of redevelopment site; DD = distance between the redevelopment project and the nearby building
βi= coefficients to be estimated; and ε = error term

Conclusions

Real housing prices decrease with building age [ln(AGE)], but increase with the flat size [ln(GFA)] and floor level [ln(FL)]. The announcement of an urban renewal project (T) has an overall positive impact on nearby property prices. The positive impact increases with size of the URA project [T.SA] and the size of the commercial elements in the project [T.COM]. The urban renewal has a negative impact on redevelopment option value of nearby housing units [T.ln(AGE)] and the effect diminishes as the distance from the URA project increases [T*ln(AGE)*DD].

The Impact of Public-sector-led Urban Renewal Projects on nearby Housing Prices in Densely Populated Areas 1The Impact of Public-sector-led Urban Renewal Projects on nearby Housing Prices in Densely Populated Areas 2
UNIVERSITY OF HONG KONG
FACULTY OF ARCHITECTURE