Redevelopment and the Urban Land Price Gradient

Residential Buildings and the Cost of Construction: New Evidence on the Efficiency of the Housing Market

“…Titman (1985) arrived at essentially the same development rule in a model with vacant land and uncertainty over optimal future uses of the land, provided P tj D (s(t Ϫ a)) is interpreted to include an uncertainty premium. 10 Empirical support for equation (3.1) has recently been provided by Rosenthal and Helsley (1994) using single-family detached homes in Vancouver, B.C., the same market studied in this paper. 11 An important implication of equation (3.1) is that, with efficient markets, when a previously developed property is sold for redevelopment, the existing building has zero value because it is demolished upon sale.…”

“…Similarly, if the proportion of home sales in location j and time t is constant over time, the vacant land price series will also be unbiased and consistent. As a robustness check, an alternate vacant land price series was constructed based on a sample of homes that likely sold for redevelopment, since such homes sell for the price of vacant land as in section III (e.g., Rosenthal & Helsley, 1994). Findings indicate that the alternative vacant land price series is highly positively correlated with the principal series developed in the text.…”

“…9 Given that the home sales in this paper are taken from ten small adjacent areas, unit construction costs are almost certainly alike for all properties in a given period. Also, demolition costs for single-family detached homes in Vancouver, B.C., are a small fraction of lot values, which is why demolition costs are set to zero (e.g., Rosenthal & Helsley, 1994). More generally, one can incorporate demolition costs by redefining c t to include the cost of demolishing the existing structure.…”

“…The price of previously developed land is equal to the value of the development option (vacant land) plus the discounted stream of rents from the current building up to the next redevelopment date (e.g., Rosenthal & Helsley, 1994). With efficient markets, landowners exercise their development option when the net profit from developing today is slightly greater than the cost of the option.…”

“…11 An important implication of equation (3.1) is that, with efficient markets, when a previously developed property is sold for redevelopment, the existing building has zero value because it is demolished upon sale. Upon redevelopment, therefore, s t (t Ϫ a) equals zero, and properties purchased for redevelopment are, in actuality, vacant land sales (e.g., Rosenthal & Helsley, 1994). It follows that the price of vacant land at time t and location j, P tj L , is given by the left-hand side of equation (3.1),…”