IDEAS home Printed from https://ideas.repec.org/a/jre/issued/v27n42005p355-370.html
   My bibliography  Save this article

Analysis of Economic Depreciation for Multi-Family Property

Author

Listed:
  • Jeffrey D. Fisher

    (Director of the Center for Real Estate Studies Professor of Finance and Real Estate Indiana University)

  • Brent C Smith

    (Department of Finance Insurance and Real Estate Virginia Commonwealth University P.O. Box 844000 Richmond, VA 23284-4000)

  • Jerrold J. Stern

    (Department of accounting Indiana University)

  • R. Brian Webb

    (UBS Realty Investors LLC)

Abstract

This paper uses a hedonic pricing model and National Council of Real Estate Investment Fiduciaries data to estimate economic depreciation for multi-family real estate. The findings indicate that investment grade multi-family housing depreciates approximately 2.7% per year in real terms based on total property value. This implies a depreciation rate for just the building of about 3.25% per year. With 2% inflation, this suggests a nominal depreciation rate of about 5.25% per year. Converted into a straight-line depreciation rate that has the same present value, this suggests a depreciable life of 30.5 years - as compared to 27.5 years allowed under the current tax laws. Thus, these laws are slightly favorable to multi-family properties by providing a tax depreciation rate that exceeds economic depreciation, which is in part due to inflation that has been less than expected during the past decade.

Suggested Citation

  • Jeffrey D. Fisher & Brent C Smith & Jerrold J. Stern & R. Brian Webb, 2005. "Analysis of Economic Depreciation for Multi-Family Property," Journal of Real Estate Research, American Real Estate Society, vol. 27(4), pages 355-370.
    • Handle: RePEc:jre:issued:v:27:n:4:2005:p:355-370
    as

    Download full text from publisher

    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol27n04/vol27n04a01.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, vol. 66(2), pages 193-199, May.
    2. Dean H. Gatzlaff & Richard K. Green & David C. Ling, 1998. "Cross-Tenure Differences in Home Maintenance and Appreciation," Land Economics, University of Wisconsin Press, vol. 74(3), pages 328-342.
    3. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72(6), pages 604-604.
    4. Stephen Malpezzi & Larry Ozanne & Thomas G. Thibodeau, 1987. "Microeconomic Estimates of Housing Depreciation," Land Economics, University of Wisconsin Press, vol. 63(4), pages 372-385.
    5. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
    6. Brent C Smith, 2004. "Economic Depreciation of Residential Real Estate: Microlevel Space and Time Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(1), pages 161-180, March.
    7. Clapp, John M. & Giaccotto, Carmelo, 1998. "Residential Hedonic Models: A Rational Expectations Approach to Age Effects," Journal of Urban Economics, Elsevier, vol. 44(3), pages 415-437, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Frank Packer & Timothy Riddiough, 2012. "Securitisation and the Commercial Property Cycle," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Frank Packer & Callan Windsor (ed.),Property Markets and Financial Stability, Reserve Bank of Australia.
    2. Yoshida, Jiro, 2020. "The economic depreciation of real estate: Cross-sectional variations and their return implications," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    3. Danny Ben-Shahar & Yoram Margalioth & Eyal Sulganik, 2009. "The Straight-Line Depreciation is Wanted, Dead or Alive," Journal of Real Estate Research, American Real Estate Society, vol. 31(3), pages 351-370.
    4. Iqbal A. Syed & Jan De Haan, 2017. "Age, Time, Vintage, And Price Indexes: Measuring The Depreciation Pattern Of Houses," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 580-600, January.
    5. Wei Li & Jean-Daniel Saphores, 2012. "A Spatial Hedonic Analysis of the Value of Urban Land Cover in the Multifamily Housing Market in Los Angeles, CA," Urban Studies, Urban Studies Journal Limited, vol. 49(12), pages 2597-2615, September.
    6. Yoshida, Jiro, 2016. "Structure Depreciation and the Production of Real Estate Services," HIT-REFINED Working Paper Series 44, Institute of Economic Research, Hitotsubashi University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Iqbal A. Syed & Jan De Haan, 2017. "Age, Time, Vintage, And Price Indexes: Measuring The Depreciation Pattern Of Houses," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 580-600, January.
    2. Wilhelmsson, Mats, 2008. "House price depreciation rates and level of maintenance," Journal of Housing Economics, Elsevier, vol. 17(1), pages 88-101, March.
    3. K. Chau & S. Wong & C. Yiu, 2005. "Adjusting for Non-Linear Age Effects in the Repeat Sales Index," The Journal of Real Estate Finance and Economics, Springer, vol. 31(2), pages 137-153, September.
    4. Sören Gröbel, 2018. "Regional heterogeneity in age-related housing depreciation rates [Regionale Heterogenität altersbedingter Wertminderungen von Wohnimmobilien]," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 38(2), pages 219-254, October.
    5. Martin Feldstein, 1979. "Adjusting Depreciation in an Inflationary Economy: Indexing versus Acceleration," NBER Working Papers 0395, National Bureau of Economic Research, Inc.
    6. Chang Woon Nam & Doina Radulescu & Doina Maria Radulescu, 2004. "Does Debt Maturity Matter for Investment Decisions?," CESifo Working Paper Series 1124, CESifo.
    7. Gisell Pugliese & Germán Forero, 2012. "Costos de mantenimiento de vivienda y tiempo de expansión de la ciudad como determinantes de movilidad urbana y pobreza," Revista de Economía del Caribe 10271, Universidad del Norte.
    8. Jonathan Halket & Lars Nesheim & Florian Oswald, 2020. "The Housing Stock, Housing Prices, And User Costs: The Roles Of Location, Structure, And Unobserved Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(4), pages 1777-1814, November.
    9. Bun Lee & Eui-Chul Chung & Yong Kim, 2004. "Dwelling Age, Redevelopment, and Housing Prices: The Case of Apartment Complexes in Seoul," The Journal of Real Estate Finance and Economics, Springer, vol. 30(1), pages 55-80, October.
    10. repec:spo:wpmain:info:hdl:2441/4dp533k0lq8dgrbgue1eid6mk1 is not listed on IDEAS
    11. Jonathan Halket & Lars Nesheim & Florian Oswald, 2015. "The housing stock, housing prices, and user costs," SciencePo Working papers Main hal-03393224, HAL.
    12. repec:hal:spmain:info:hdl:2441/4dp533k0lq8dgrbgue1eid6mk1 is not listed on IDEAS
    13. Arnold, Lutz G. & Babl, Andreas, 2014. "Alas, my home is my castle: On the cost of house ownership as a screening device," Journal of Urban Economics, Elsevier, vol. 81(C), pages 57-64.
    14. Auerbach, Alan J, 1979. "Inflation and the Choice of Asset Life," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 621-638, June.
    15. Mayock, Tom & Tzioumis, Konstantinos, 2021. "New construction and mortgage default," Journal of Banking & Finance, Elsevier, vol. 133(C).
    16. Bergström, Villy & Södersten, Jan, 1979. "Inflation, Taxation and Capital Cost," Working Paper Series 19, Research Institute of Industrial Economics.
    17. Clapp, John M. & Bardos, Katsiaryna Salavei & Wong, S.K., 2012. "Empirical estimation of the option premium for residential redevelopment," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 240-256.
    18. Clapp, John M. & Salavei, Katsiaryna, 2010. "Hedonic pricing with redevelopment options: A new approach to estimating depreciation effects," Journal of Urban Economics, Elsevier, vol. 67(3), pages 362-377, May.
    19. repec:ces:ifodic:v:1:y:2003:i:2:p:14567962 is not listed on IDEAS
    20. John Corgel, 2007. "Technological Change as Reflected in Hotel Property Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 257-279, February.
    21. David F. Bradford, 1981. "Issues in the Design of Saving and Investment Incentives," NBER Working Papers 0637, National Bureau of Economic Research, Inc.
    22. Schulz, Rainer & Werwatz, Axel, 2008. "House prices and replacement cost: A mMicro-level analysis," SFB 649 Discussion Papers 2008-013, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    23. Chun-Chang Lee & Hsueh-Ling Fan, 2016. "The Impact of Administrative Characteristics and Residential Types on Income Capitalization Rates in Taipei, Taiwan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(10), pages 602-619, October.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jre:issued:v:27:n:4:2005:p:355-370. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: JRER Graduate Assistant/Webmaster (email available below). General contact details of provider: http://www.aresnet.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.