Redevelopment, Gentrification and Neighbourhood Housing Cycles: A General Equilibrium Approach


The age of housing stock affects sorting of high- and low-income households into different neighbourhoods within a city (Rosenthal, 2009). As neighborhoods undergo development and redevelopment over time, the spatial distribution of different types of households changes considerably. There has been a heated debate on how to regulate housing redevelopment. On the one hand, redeveloping old neighbourhoods are expected to increase (high-quality) housing supply and decrease housing prices. On the other hand, such redevelopment also incurs significant gentrification and displacement of incumbent residents. To study the welfare consequences of redevelopment and relevant policies, we build a general equilibrium model that features forward-looking housing developers, heterogenous households with non-homothetic demand for housing, and costly movement across neighbourhoods. Developers choose when to (re)develop, how many units to build, and the quality of housing units. Housing quality depreciates over time, which prompts household movements. We aim to quantify the impact of various housing policies that are designed to restrict or encourage redevelopment.