Land, Structure & Depreciation

Abstract

We introduce a hedonic price model which enables us to disentangle the value of a property into the value of land and the value of structure. For given reconstruction costs we are able to estimate the impact of physical deterioration, functional obsolescence and vintage effects on the structure and the impact of time on sale (and external obsolescence) on the land value simultaneously. Our findings show that maintenance has a substantial impact on the rate of physical deterioration. After 50 years of not or barely maintaining a home a typical structure has lost around 43% of its value. In contrast, maintaining a home very well results in virtually no physical deterioration in the long run.

Keywords: Hedonic Price Model, House prices, Maintenance