Kaohsiung City

According to the Taiwan Real Estate Industry Yearbook (2009), we defined Sanmin, Lingya, Cianjin, Cianjhen, Gushan and Zuoying Districts as high-developed areas and all the other districts as low-developed areas, as tested by the Chow test. Under the null hypotheses that real estate regression models of high-developed areas and low-developed areas correspond to coefficients and constants equally, the F-value strategy was 196.0286, higher than the critical value by 2.0031 at a significance level of 1%. This indicates that the regression results of different developed regions exhibited significant differences. The F-value regression results for land value and building value strategies were 187.8819 and 39.87618, respectively, higher than the critical value by 2.0031 and 2.0416 at a significance level 1%. These also exhibited significant differences. Therefore, it was necessary to simulate the depreciation effect separately for areas with different degrees of development.

From Figure 3 we can see that the timing of inverse depreciation of real estate for high-developed areas and low-developed areas in Kaohsiung City rose relatively later than in Taipei City. Present value ratios in the 50^th year were 62.19% and 50.33%, respectively. The residual value rate in high-developed areas was higher than for low-developed areas. The age effect on building value for both high-developed areas and low-developed areas decreased year by year. Present value ratios in the 50^th year were 27.67% and 26.45%, respectively, virtually the same. These indicate that depreciation of buildings was less in both areas. As for the land value, inverse depreciation rose in the 27^th year and 30^th year, respectively. Present value ratios in the 50^th year were 98.5% and 75.23%, respectively. The timing of inverse depreciation and the present value ratio rose higher and earlier in high-developed areas than in low-developed areas. Therefore, in both high-developed areas and low-developed areas, inverse depreciation rose for real estate and land value but not for building value. These results validate hypothesis I and hypothesis II, and the simulation results conform to hypothesis III in Kaohsiung City.

In comparison, inverse depreciation arose in both cities, only the timing of inverse depreciation occurred earlier in Taipei City than in Kaohsiung City. As to land value, the timing of inverse depreciation occurred in both city is fairly equally, but the present value ratio in the 50^th year in Taipei City was much higher than in Kaohsiung City. This may be because renewal in low-priced areas of Kaohsiung City was relatively unexpected but much anticipated in Taipei. In the case of decreasing building value year by year in both cities, this verified that inverse depreciation results

20

from the redevelopment value of land regardless of the value of buildings. Inverse depreciation shows positive correlation with the potential for regional redevelopment, verifying the relationship with spatial variation and inverse depreciation and hypothesis III, that the higher the redevelopment potential, the more obvious is inverse depreciation.

Figure 3. Age and PVR in Kaohsiung City.

Table 7. Timing of Inverse Depreciation and PVR in the 50^th Year.

Item

Kaohsiung City Taipei City All High-

Developed

Low-

Developed All High- Developed

Low- Develope

d PVR of

RE 58.40% 62.19% 50.33% 85.38% 88.38% 78.90%

Timing

of RE 42 50 41 29 28 32

PVR of

Buildings 27.58% 27.67% 26.45% 33.47% 33.89% 33.42%

PVR of

Land 93.82% 98.50% 75.23% 107.68% 107.20% 102.28%

Timing

of Land 27 27 30 25 25 26

21

Conclusions

The age effect of real estate has generally been interpreted as the depreciation of real estate with increasing building age the decreasing utility value. This study was based on real estate newsletter of transaction prices, and empirical results indicated that real estate value exhibited inverse depreciation, which means an appreciation after depreciation with the lapse of time. This supports hypothesis I. Prices of building showed that with increasing building age buildings continue depreciating, exhibiting a curve convex to the original point, but not reversal, supporting hypothesis II, while change in land value is similar to that of real estate, decreasing then increasing with the lapse of time. However, the change in land value curve is steeper than that for real estate, verifying that inverse depreciation derives from the inverse value of land regardless of the value of buildings.

These empirical results are substantiated in the high-redeveloped areas and low-redeveloped areas of both Taipei City and Kaohsiung City, showing universality. Nevertheless, potential redevelopment areas will be relatively obvious. This inverse depreciation illustrates why the price of old apartments repeatedly rise in Taipei City.

Furthermore, the composition ratio of land and building in real estate is changes with the age. If it is not possible to effectively grasp the percentage of building value in real estate value with time, then estimating the depreciation rate of buildings by the depreciation rate of real estate may be inaccurate, especially in high-developed areas.

References

Allison, P. D., 1999, Multiple Regression: A Primer, Thousand Oaks: Pine Forge Press.

Barras, R. and Clark, P., 1996, Obsolescence and performance in the Central London office market, Journal of Property Valuation and Investment, 14(4):63–78.

Baum A., 1991, Property Investment Depreciation and Obsolescence, Routledge: London.

Baum, A. and Turner, N., 2004, Retention rates, reinvestment and depreciation in European office markets, Journal Property Investment and Finance, 22(3): 214–235.

Cannaday, R. E. and M. A. Sunderman, 1986, Estimation of depreciation of single-family appraisals, AREUEA Journal, 14(2):255-273.

Chen, Fong-Yao, Young, I-Jan, 2007, The accuracy of valuation: A comparison of appraisers and mass appraisal, Journal of Housing Studies, 16(2):67-83.

Clapp, J. M. and C. Giaccotto, 1998, Residential hedonic models: a rational expectations approach to age effect, Journal of Urban Economics, 44(3):415-437.

Clapp, J.M. and K. Salavei, 2010, Hedonic pricing with redevelopment options: a new approach to estimating depreciation effects, Journal of Urban Economics, 67 (3):362–377.

Coulson, N. E. and D. P. McMillen, 2008, Estimating time, age and vintage effects in housing prices, Journal of Housing Economics, 17:138-151.

Davis M. A. and M. G. Palumbo, 2008, The price of residential land in large US cities, Journal of Urban Economics, 63:352–384.

Davis M. A. and J. Heathcote, 2007, The price and quantity of residential land in the United States, Journal of Monetary Economics, 54 : 2595–2620.

Dixon, T., Crosby, N. and Law, V., 1999, A critical review of methodologies for measuring rental depreciation applied to UK commercial real estate, Journal of Property Research, 16(2):153-180.

Dunse, N., and C. Jones, 2005, Rental depreciation, obsolescence and location: The case of industrial properties, Journal of Property Research, 22 (2-3):205-223.

Fisher, J. D., B. C. Smith, J. J. Stern, and R. B. Webb, 2005, Analysis of economic depreciation for multi-family property, Journal of Real Estate Research, 27 (4):355-369.

Fraser, W., 1993, Principles of Property Investment and Pricing (Second Edition), Macmillan: London.

Goodman, A. C. and T. G. Thibodeau, 1995, Age-related heteroskedasticity in hedonic price equations, Journal of Housing Research, 6(1):25-42.

Goodman, A. C. and T. G. Thibodeau, 1997, Age-related heteroskedasticity in hedonic price equations:

An extension , Journal of Housing Research, 8(2):299-317.

22

Hulten, C. R. and F. C. Wykoff, 1981, The estimation of economic depreciation using vintage asset prices: an application of the Box-Cox power transformation, Journal of Econometrics, 15(3):367-396.

Jones, W. H., M. G. Ferri and L. R. McGee, 1981, A competitive testing approach to models of depreciation in housing, Journal of Economics and Business, 33(3):202-211.

Lee, B. S., E. C. Chung, and Y. H. Kim, 2005, Dwelling age, redevelopment, and housing prices: the case of apartment complexes in Seoul , The Journal of Real Estate Finance and Economics, 30(1):55-80.

Lee, Hung-Jian, Chang, Chin-Oh, and Hua,Ching-Chun ,2006, The relationship between floor area and unit price across different residential types in Taipei metropolitan area , Journal of Taiwan Land Research,9(1):63-87.

Liang, Jen-Hsu, 2012a, Reversion on real property depreciation, Journal of Housing Studies, 21(2):71-89.

Liang, Jen-Hsu, 2012b, Age effect of building value depreciation, Land Economics Annual Publication, 23:94-112.

Lin, T. C. and M. H. Jhen, 2009, Inequity of land valuation in the highly developed city of Taipei, Taiwan, Land Use Policy, 26(3):662-668.

Lin, Tzu-Chin, Lee, Wang-Ying, and Chen, Kwo-Hwa, 2011, Condominium depreciation and building taxes , City and Planning,38(1):31-46.

Malpezzi, S., L. Ozanne, and T. G. Thibodeau, 1987, Microeconomic estimates of housing depreciation, Land Economics, 63(4):372-385.

Randolph, W. C., 1988, Estimation of housing depreciation: short-term quality change and long-term vintage effects, Journal of Urban Economics, 23(2):162-178.

Rosenthal, S. S., 2008, Old homes, externalities and poor neighborhoods: a model of urban decline and renewal, Journal of Urban Economics, 63(3):816–840.

Rubin, G. M., 1993, Is housing age a commodity? Hedonic price estimates of unit age, Journal of Housing Research, 4(1):165-184.

Salway, F., 1986, Depreciation of Commercial Property, Calus Research Report, College of Estate Management, Reading.

Samuelson, P. A., 1964, Tax deductibility of economic depreciation to insure invariant valuations, Journal of Political Economy, 72(6):604-606.

Sirmans, G. S., D. A. Macpherson and E. N. Zietz, 2005, The composition of hedonic pricing models, Journal of Real Estate Literature, 13(1):3-43.

Smith, B. C., 2004, Economic depreciation of residential real estate: microlevel space and time analysis, Real Estate Economics, 32(1):161-180.

Soderberg, B., 2002, A note on the hedonic model specification for income properties, in Wang, K. and M. L. Wolverton, ed., Real Estate Valuation Theory, Boston: Kluwer: 157-180.

Taubman, P. and R. H. Rasche, 1969, Economic and tax depreciation of office building, National Tax Journal, 22(3):334-346.

Vanderford, S. E., Y. Mimura and A. L. Sweancy, 2005, A hedonic price comparison of manufacture and site-built homes in the non-MSA USA, Journal of Real Estate Research, 27(1):83-104.

Wilhelmsson, M., 2008, House price depreciation rates and level of maintenance, Journal of Housing Economics, 17(2):88-101.

Wolverton, M. L., 1998, Empirical analysis of the breakdown method of estimating physical depreciation, The Appraisal Journal, 66(2):163-171.