Estimation of Depreciation Path for Residential Properties

This paper estimates depreciation of residential properties in that it is an essential element of cost approach to property valuation. In Taiwan, a depreciation path is pre-specified in laws for calculating tax liability but few empirical works have so far been undertaken. A data set of 2099 transactions from October 1999 through March 2003 in Taipei City is examined. A hedonic pricing model in the double-log form is constructed with an age variable representing the impacts of structure deterioration on property values. A concave depreciation path is found; the property value decreases at a slower pace during the early years than during the later periods. This concave path differs from those specified in laws; the straight line and constant rate methods, and is better explained by sinking fund method. Moreover, properties of different structures depreciate at different rates although both in a concave path. This finding is consistent with the current regulations. Research finings all in all suggest that real depreciation path deviates from lawspecified ones significantly and its consequent inequity in tax payments shall not be ignored. A more accurate estimation of structure depreciation for residential properties is urgently needed.