I'm not sure if this is a bug or if it's working as intended, but at the moment the housing progression is a little odd.
Currently it's:
Hut
House
Villa and also Estate
Villa and also Mansion
The estates upgrade into mansions fine, but I'm wondering if the villa is supposed to upgrade into estates and then be removed from the building menu. To me this makes sense: 5 city levels, 5 housing types.
