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The economic depreciation of real estate: Cross-sectional variations and their return implications

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  • Yoshida, Jiro

Abstract

This study analyzes how real estate depreciates in economic value as it ages. The economic depreciation of real estate affects investment decisions by decreasing appreciation returns and increasing income returns. The data show significant cross-sectional variation in depreciation rates for residential and commercial real estate for Japan and residential real estate for the U.S. The 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. The depreciation rate of structures is approximately 6% for Japanese housing, 10% for Japanese commercial structures, and 1% for the U.S. housing. This study also proposes new methods to correct for survivorship biases. These results serve as essential inputs for the analysis of real estate investment, consumer choice of housing, sustainability, and the macroeconomy.

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  • Yoshida, Jiro, 2020. "The economic depreciation of real estate: Cross-sectional variations and their return implications," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:pacfin:v:61:y:2020:i:c:s0927538x18304505
    DOI: 10.1016/j.pacfin.2020.101290
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    Cited by:

    1. Suzuki, Masatomo & Asami, Yasushi & Shimizu, Chihiro, 2021. "Housing rent rigidity under downward pressure: Unit-level longitudinal evidence from Tokyo," Journal of Housing Economics, Elsevier, vol. 52(C).
    2. Lopez, Luis A. & Yoshida, Jiro, 2022. "Estimating housing rent depreciation for inflation adjustments," Regional Science and Urban Economics, Elsevier, vol. 95(C).
    3. Suzuki, Masatomo & Shimizu, Chihiro, 2024. "Obsolete housing equipment, weak renovation, and rapid depreciation of Japanese condominiums," Journal of the Japanese and International Economies, Elsevier, vol. 71(C).
    4. Cashman, George D. & Harrison, David M. & Sheng, Hainan, 2022. "Short sales, short risk, and return predictability in Asia-Pacific real estate markets," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    5. Cameron LAPOINT & SAKABE Shogo, 2021. "Place-Based Policies and the Geography of Corporate Investment," Discussion papers 21059, Research Institute of Economy, Trade and Industry (RIETI).
    6. Yamagishi, Atsushi, 2021. "Minimum wages and housing rents: Theory and evidence," Regional Science and Urban Economics, Elsevier, vol. 87(C).
    7. Yasutaka Ogawa & Jiro Yoshida, 2024. "Aging, Housing, and Macroeconomic Inefficiency," IMES Discussion Paper Series 24-E-04, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    Keywords

    Depreciation; Capital consumption; Housing; Commercial real estate; Japan; USA;
    All these keywords.

    JEL classification:

    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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