I think the issue here is that the (default?) electrified tram lines don't have the NO_HOUSES flag set, which is what is happening here - town thinks it's fine to build houses along a tramline, the bordering road is not considered after that

Ah, I am (perhaps?) mistaken - the issue is that it's checking tram types at all - the town growth algorithm only tries to build houses next to roads, but then RoadTypesAllowHouseHere checks tramtypes as well. Take out the following line, and that fixes the issue.

Of course, it does mean that NO_HOUSES has no effect for tramtypes...

Should the default trams be changed to NO_HOUSES? Perhaps the logic should be to go by what the road type says, unless there is no road, then go by what the tram type says.

Thinking about it (more), we don't want NO_HOUSES on default trams, as that would mean (currently) that road + tram would become devoid of houses. Is the (actual (actual)) issue that this is also checking trams when there's no valid roadtype (i.e. tram on its own) ?

That's why I said go by what the road type says if it exists, so that a default road and a tram type with no houses on it would still get houses. Words.

Taken another look at this. There are 2 options -

1. NO_HOUSES on a road/tramtype prevents any house from being built in a 3x3 area surrounding it
2. NO_HOUSES only prevents houses if there are no other valid surrounding roads (this is, more or less, the current behaviour)
3. Combination of the above, where tramtype are only taken into account if there is no road on the same tile.

NewGRF specs are a little ambiguous on it: https://newgrf-specs.tt-wiki.net/wiki/Action0/Roadtypes#Road_type_flags_.2810.29

A demonstration of the first method is below

Further thoughts/opinions appreciated.

IMO the most logical / correct way would be to only build houses if neither of the tramtype or roadtype has NO_HOUSES.

So leave the flags on the trams and roads as is, but change the code so it checks for both, and only build houses if both of the types allow it.

Wasn't the whole point of this highway thing to stop town growth from advancing along it? How did it turn into a neighbouring road check and these ugly and illogical exclusion zones? While town growth can still branch off the highway (#8506) or jump to other town and grow there?