When does Urbanization occur in Age of Steam
You place the new city as your first action during your Build Track phase.

On page 2 of the rules 


  Urbanization action:
  
  Implemented during the Build Track phase.  This action allows this player to place one of the New City tiles on a Town before they build their track.


This is from the Warfrog edition (2002).  It seems the rules haven't changed much at all despite the plethora of editions.