Financial System Workshop: A Dynamic Model of Urban Growth and the Evolution of Real Estate Rents and Prices

Professor Sheridan Titman, one of the ten most cited scholars in finance, will present a seminar on his new working paper coauthored with Guozhong Zhu. The paper develops a dynamic urban model featuring workers, firms, and landowners in a city composed of a fixed urban core and an expandable suburban area. The model incorporates durable housing, endogenous population, productivity, prices, and density. Landowners face an optimal timing problem—modeled as a real option—when deciding whether to develop housing, taking into account that total factor productivity evolves with urban agglomeration externalities.

The authors derive steady-state equilibria across labor, capital, land, and housing markets, enabling analysis of how development speed, price volatility, and rent-to-value (R/V) ratios vary spatially and over time. Calibrated to a fast-growing city like Austin, TX, the model shows that suburban land is developed earlier, while the urban core sees slower initial development followed by sharp increases in density and housing prices. In contrast, suburban prices remain stable with persistently higher R/V ratios.

A key result is that housing durability generates asymmetries: population and price increases during city growth are larger than the declines during downturns. These asymmetries are most pronounced in suburban markets, where prices fall significantly in declining cities but rise only moderately in growing ones.