Economic Depreciation in the Property Value: Cross-Sectional Variations and Their Implications on Investments
48 Pages Posted: 26 Jan 2018
Date Written: December 14, 2017
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: Suggested Citation