There is a continual need for dwellings through which people can integrate their own values, form social links, and become anchored in a positive way. To meet this vital need, sustainability should be a core dimension of housing quality and be central to the development process as a whole. On the other hand, cities clearly appear to be the most important location for action to help the goals of the sustainable development. In this context, the purpose of this paper is to highlight the potential of historic cities and their traditional housing areas to achieve urban sustainability, in the context of compact city form. It consists of four sections with a brief introduction on the critical role of cities for sustainability. The first section highlights the importance of traditional housing areas for urban sustainability. The second section covers an evaluation of the suitability of the compact city form for historic neighbourhoods, through empirical studies undertaken in Bursa. The theoretical approach is based on the transactional perspective, which considers home and home environments as a transactional whole that defines and is defined by a range of cultural, social and psychological factors. Observational and ethnographic research methods are used together with the surveys applied in a valuable traditional neighbourhood in the city of Bursa, one of the most important historic cities of a developing country, Turkey. The paper concludes with the findings of the case study to offer some proposals for policy principles of sustainable urban development in historic cities.