Real option value over a housing market cycle

J. Clapp, P.M.A. Eichholtz, T. Lindenthal

Research output: Contribution to journalArticleAcademicpeer-review

4 Citations (Scopus)

Abstract

This paper analyzes how the dynamics of house prices are affected by the option to rebuild or enlarge existing dwellings. The nonlinear functional form for option value and zoning limits provides identification of changes in option value over the cycle. For homes with high development potential, our results show that about 40% of the price increases during the boom years after the fall of the Berlin Wall were related to increased option value. In the subsequent bust about 50% of their price decline was associated with decreased option value. For dwellings with low redevelopment potential 12% of the decline in real value can be attributed to changing option value.
Original languageEnglish
Pages (from-to)862-874
JournalRegional Science and Urban Economics
Volume43
Issue number6
DOIs
Publication statusPublished - 1 Jan 2013

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