Ap­plied Urb­an Eco­nom­ics and Real Es­tate

Course content

In the age of urbanization and gentrification real estate investments have become increasingly attractive. However, several challenges are currently facing modern cities. These encompass different urban disamenities such as congestion, noise, pollution, and the higher risks of spread of diseases (e.g. COVID 19). Others involve issues related to the labour market including the increasing commuting times, low real wage growth, and skills gap. But, maybe the largest of all is the raising housing prices (the apparent consequence of agglomeration economies) resulting from the migration to large cities (the urbanization process).

This course focuses on presenting and discussing the basis urban economic analysis and its use in policy evaluation. It also looks at how various economic factors influence the real estate market and affect real estate values. The main themes which will be covered in the course are: agglomeration economies, analysis of urban spatial structure (commuting, housing production and population density), urban sprawl and land-use controls, hedonic price analysis, residential location choice and tenure choice, housing policies, urban distress (urban poverty and segregation), urban externalities (congestion, crime and pollution), cities and transport systems, and spatial labor markets (monopsony):

• Agglomeration economies: Why do cities exist? This is the fundamental question of urban economics. The answer to this question depends, at least partly, on the agglomeration economies and the scale economies. The agglomeration economies make larger urban areas (cities) more productive than small ones and the scale economies are known as “increasing returns to scale”. Urban economists have had a major effect on policy, and the trend toward city (de)regulation and many of the urban policies (e.g. land-use controls, rent controls and housing subsidy programs) and the abolitions of the place based policies are due to lessons from urban economics.
• Spatial equilibrium in the Alonso-Muth-Mills model: The basic urban economic model is a monocentric city model. Essential assumptions in this model are that employment is constrained in one location, monetary commuting costs depend on distance, and workers may freely choose the optimal residence location. Furthermore, it is assumed that house prices are endogenous and workers are homogeneous in all aspects except for income. The course provides a mainstream treatment of urban spatial structure including demand for housing and commuting in a standard monocentric city model.
• The static model and the Rosen-Roback framework: In the standard monocentric city model, the role of residential amenities is ignored, but these are clearly important. In the Rosen-Roback framework, the residential location choice, job location and commuting distance depend explicitly on the spatial distribution of residential urban amenities. The course offers a detailed analysis of the possible implication of spatial distribution of urban amenities. For example, suppose that all jobs and amenities are in city centres. This is likely a reasonable description for Denmark, where residential amenities and employment tend to be in, or close to, historic city centres. In this case, an increase in household income would induce households to move residence closer to city centres. Another example can be the analysis of urban externalities (e.g. congestion, crime and pollution).
• Hedonic price analysis and the residential location choice: Property value hedonics is the workhorse model for valuation of local public goods and urban amenities. The hedonic price function describes a price equilibrium on a market for a heterogeneous commodity, without describing the underlying forces of demand and supply. Models of residential location choice (equilibrium sorting models) provide a structural description of the market which opens up the possibility for doping counterfactual (policy) analysis. The recent literature has demonstrated that household location choices are not only affected by the accessibility to employment opportunities but also by accessibility to urban amenities. The course provides an introduction to current practice in using hedonic price analysis and residential sorting models. The residential sorting models are useful for analyses of urban distress (e.g. urban poverty and segregation).
• Transportation and land use in urban areas: The role that transportation plays in the spatial development of urban areas is of great interest. The focus here is on the question of where consumption or production occurs, instead of the question of how much to consume and produce. In order to answer this question, a monocentric theory of residential an employment location can be applied.

These topics cover many of the important urban economic issues that have emerged in the academic literature over the past three decades. The focus will be on selected topics dealing with contemporary issues of urban policy such as pricing and regulation.

This course will also benefit the students by providing i) deep business knowledge related to real estate markets, ii) by discussing ethical dilemmas emerging from urbanization and gentrification, and iii) by allowing them to protect the prosperity of next generations.