Economic Depreciation in the Property Value: Cross-Sectional Variations and Their Implications on Investments

48 Pages Posted: 26 Jan 2018

See all articles by Jiro Yoshida

Jiro Yoshida

Pennsylvania State University - Smeal College of Business; The University of Tokyo - Graduate School of Economics

Date Written: December 14, 2017

Abstract

This study compares the rate of property value depreciation between different property types, locations, and countries by using commercial and residential data for the U.S. and Japan. The property-level depreciation rate is larger if a property is commercial, newer, denser, located in a smaller city, more distant from the central business district, and in Japan. A larger depreciation rate directly decreases appreciation returns and increases the equilibrium income returns (i.e., cap rates). The depreciation rate for the structure component also varies significantly by property type and country; approximately 7% for residential properties and 10% for commercial properties in Japan in contrast with 1% for residential structures in the U.S. This study also demonstrates the difference in the estimation methods and the importance of correcting survivorship biases. These results serve as important inputs for the analysis of real estate investment, consumer choice of housing, sustainability, and macro economy.

Keywords: capital consumption, housing, commercial real estate, hedonic analysis, survivorship bias, demolition, Japan, USA

JEL Classification: R32; D24; E23

Suggested Citation

Yoshida, Jiro, Economic Depreciation in the Property Value: Cross-Sectional Variations and Their Implications on Investments (December 14, 2017). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3109760 or http://dx.doi.org/10.2139/ssrn.3109760

Jiro Yoshida (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

368 Business Building
Smeal College of Business
University Park, PA 16802
United States
814-865-0392 (Phone)
814-865-6284 (Fax)

HOME PAGE: http://www.personal.psu.edu/juy18

The University of Tokyo - Graduate School of Economics ( email )

7-3-1 Hongo
Bunkyo-ku, Tokyo 113-0033
Japan
813-5841-5653 (Phone)
813-5841-5521 (Fax)

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