Academic journal article The Town Planning Review

Effects of Urban Renewal on Non-Subsidised Property Owners: Evidence from East Germany

Academic journal article The Town Planning Review

Effects of Urban Renewal on Non-Subsidised Property Owners: Evidence from East Germany

Article excerpt

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In many cities, especially in regions with economic decline, policymakers try to support local development and fight urban blight by introducing urban renewal projects. Such projects are generally justified by the assumption that there are negative externalities within the existing urban structure which deter property owners from investing in deprived areas and which lead to the problem of inaction (Arvan and Nickerson, 2006; Cho, 1971). Such externalities are, for example, a negative perception of the location or unattractive buildings in the neighbourhood. If dilapidated buildings in the neighbourhood negatively impact one's return on investment, more and more property owners will decide not to invest. This damage of mutual confidence can result in poor housing quality, deferred maintenance, social instability and a reduction in the quality of life. Schall (1976) proposes that public urban renewal measures can erase negative externalities and raise the quality of an urban neighbourhood from a slum to distinct levels which can be maintained autonomously by local property owners. This process requires cooperative behaviour and it is questionable whether urban renewal will always work in this optimal way.

Property owners may exhibit free-rider behaviour since the positive externalities from urban renewal are capitalised in the land rent and individual investment may not be needed in order for them to benefit from urban renewal. This possibility of a crowding out of housing investment by increasing housing externalities and increasing land rents (because of urban renewal activities) has been modelled recently by Rossi-Hansberg et al. (2010). There are several empirical evaluations and case studies which discuss the efficiency of urban renewal activities in terms of costs and benefits, for example, in the US. These studies include Anderson (1964), Davis and Whinston (1961), Schaaf (1960), Wilson (1967), Gotham (2001) and Newman (2004). Cost benefit analyses were used in Austria (Morawetz et al., 1988) and Hong Kong (Lee and Chan, 2008) to identify the effects of different approaches of urban renewal. In Germany, some macroeconomic studies on urban renewal programmes concentrated on the multiplier effects of the subsidies (DIW, 1996, RWI, 2004). One relevant result from these studies is that the success of urban renewal is rather limited. It seems that technological and economic trends, which lead to the decline of cities or city neighbourhoods, are too strong so that the use of subsidies to revitalise urban areas proves of little success (Glaeser 2011). Programmes which focus directly on improving living conditions and the employment situation of people in deprived neighbourhoods - like the area-based initiatives in the UK - have been found to have positive effects on employment (Gutiérrez Romero, 2009).

The aim of this paper is to empirically explore the impact of urban renewal measures on housing markets where politicians expect to stimulate investment and produce positive spillovers. Usually urban renewal subsidies are only assigned to a selective number of recipients. Therefore, we did not primarily focus on property owners and investors who received direct urban renewal subsidies earmarked for renovation or new-build activities, but on the reaction of all property owners who were not directly subsidised but who may benefit from positive externalities.

In order to measure this complex impact structure and to consider the uncertainty of this relationship we need to expand upon a specific approach. Using the real option theory we analyse how subsidies, used to demolish structures and to improve public spaces, increase the development opportunities of residential properties. On the basis of this approach, we come to a better understanding of whether and why property owners in urban renewal areas often hesitate to invest.

Inspired by the idea of the real options model, we developed a specific empirical methodology and real option related variables to analyse the proposed effects of urban renewal. …

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