Effect of Private Externalities in Urban Housing Renewal Investment: Empirical Assessment Using a Game-Theory Approach

Abstract

The renewal of urban housing is a major challenge for urban policy makers in the quest for more livable, resource-efficient, and socially inclusive cities. However, the policy-making process involving urban renewal is complex. There are several agents with distinct objective functions, difficult to harmonize within the overall purpose of maximizing social welfare. Once urban renewal processes are terminated, or at least once the renewal momentum is such that it allows the rebirth of the housing market, it is unanimously agreed that all agents are better off. But this usually requires a jump start based on strong up-front public financing. Why does this happen? Is it inevitable? The effects of urban renewal are wider than the physical assets under intervention and have social, economic, and environmental implications to agents (owners, tenants, local businesses, etc.) that are not involved in the renewal processes. This paper focuses on a specific type of externalities—effects on housing prices—and tries to link the expected valorization (or not) of housing prices with the decision of owners or promoters to invest in housing renewal. The methodology used is based on an empirical game-theory model validated by a real case study—the city of Lisbon, Portugal. The conclusions are that there is no natural incentive for private investors to initiate the renewal process in a “nonrehabilitated” area, even considering the low purchase prices of existing buildings, because the expected profits are much lower in nonrehabilitated areas compared with the possible returns in already rehabilitated areas. The data evidence a gross profit of more than double in buy–renew–sell processes in rehabilitated areas compared with nonrehabilitated areas in the city of Lisbon, the capital of Portugal.