26th Jun 2018

Depreciation and its Effect on Property Values

We live in a fast-moving world where housing styles are being driven by design-savvy consumers, hungry for the “latest” looks and trends in both construction and fitout.  Much of this escalation of consumer interest can be attributed to the vast number of home renovation/lifestyle shows on TV, insatiable appetite for social media (particularly Instagram) and also the diverse choice of products and materials available in the marketplace today.

Throughout the decades, we can all recall the many distinct architectural styles of housing trends which, at the time, are heavily promoted as the aspirational must-have “hot new look”.  The latest housing genres are promoted to engage people emotionally however it is the prudent investor who can view some real estate trends with a more critical eye with awareness as to how quickly the particular style will become dated and lose its appeal.

The future value of any property is affected by the depreciation factor and to understand the impact that this will have on a property’s worth you need to understand the characteristics of depreciation and how this manifests itself in buildings.  The important depreciation characteristics can be summarised as:

  • Physical Obsolescence
  • Functional Obsolescence
  • Economic Obsolescence

 Physical Obsolescence refers to the fact that anything that has been physically built, will eventually start to deteriorate and will require maintenance.  For example, a house built many decades ago will, without any major works, have deteriorated to an inferior state compared to its original structure and condition.

Functional Obsolescence refers to the utility and design of the improvements.  For example, a house built many years prior, may have plenty of physical obsolescence but may have had extensive maintenance works carried out and hence retained its physical state however the size, layout and design as well as the bathroom and kitchen fitout would render it dysfunctional in today’s modern world of consumer expectation.

Economic Obsolescence refers to the external factors which impact the value of a property – this can be the market conditions or even External Obsolescence.  For example, factors such as changes in Safety Codes on a building, changes in zoning, or a change in the built-up environment surrounding the property which has become quite different to what was previously in place.

Over the past 20 years, we have witnessed marked improvements in housing construction techniques, design and technology advancements and these factors are influencing the rate of depreciation as a whole.  When encompassing all of the above characteristics, it is evident that depreciation rates would have accelerated considerably and invariably affect the value of the property.

With ongoing advances in housing design and construction, along with consumer-demand carrying an ever-changing taste in style, this means that many properties face a faster rate of depreciation than others.  There are specific house and apartment styles that fall into this category. As experienced Buyers Agents, we act on behalf of buyers to seek out the best types of property with a focus on protecting our clients against risk from the pitfalls and compromises that may not be apparent at the time.  It’s critical to understand the fundamental drivers of market performance and what characteristics the property offers to increase the capital value of a property.  LMW Advisory has vast expertise in securing quality property on behalf of our clients and on a daily basis we are helping buyers and investors navigate through the complexities of finding the right property.     

If you are interested in understanding the aspects that will affect the future value of your property, please contact Ben Lamers, Director LMW Advisory on 0407 723 770 or ben.lamers@lmw.com.au for a no-obligation discussion.