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Housing in Big Cities: The Capitalization Premium

Author

Listed:
  • Katja Gehr
  • Linus Kraft
  • Michael Pflüger

Abstract

This paper establishes a novel city size premium which may be termed the capitalization premium. Real estate investors derive benefits from investing in larger cities, most notably lower housing risk and/or higher expected rent growth. Standard asset valuation implies that, given the level of rents, investors are willing to pay increasingly higher housing prices as city size increases, a capitalization premium. Enabled by fine-grained microgeographic property prices and rents and an estimation strategy combining fixed-effects and instrumental variables, the key contribution of this paper is to identify the relationship between city size and the capitalization rate and to provide an estimate of the magnitude of this capitalization premium. We also spell out key implications of this finding for urban economics and macroeconomics.

Suggested Citation

  • Katja Gehr & Linus Kraft & Michael Pflüger, 2026. "Housing in Big Cities: The Capitalization Premium," CESifo Working Paper Series 12430, CESifo.
    • Handle: RePEc:ces:ceswps:_12430
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    File URL: https://www.ifo.de/DocDL/cesifo1_wp12430.pdf
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    Keywords

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    JEL classification:

    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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