Shrinking metropolitan area: Costly homeownership and slow spatial shrinkage

Abstract

With a simple model of land use and market arbitrage, this paper investigates the impact of population decline – when existing homeowners compete to attract a small number of new residents – on homeownership and land use. We show that, if a strictly positive cost is required for ownership abandonment, selling used houses is impossible in the periphery, while leasing is possible. We also show that only long-life-quality houses, which require a larger initial investment and sustain greater utility for longer than conventional ones, attract new residents to the periphery. Social welfare may decrease, because the government has to maintain the slowly shrinking, less densely inhabited urban area.