# RECORD f7e86f195247c4fc151ec0afdcc5092a26e0583f
# TITLE: A Decomposition approach for Assessing Land Leverage and Depreciation Rate on the Real Estate Market – Evidence from Warsaw Poland
# YEAR: 2023.0  VENUE: Real Estate Management and Valuation  DOI: 10.2478/remav-2023-0006
# AUTHORS: J. Waszczuk
# PAGES: 14  CANDIDATE TABLE PAGES (1-based): []
# ABSTRACT: ABSTRACT Most property valuation research concerns entire properties consisting of land and structures. However, different features of land and capital as factors of production determine different patterns shaping their value and their different impact on the total price of real estate. In this article the hedonic decomposition model, which controls for differences in housing quality, is applied to decompose the price of an apartment into the land and structure components. The depreciation rate of housing was calculated and taken into account to properly isolate the dynamics of land over time. This allowed us to compare the house price index with the dynamics of land and structure. The empirical analysis was carried out on the data for the city of Warsaw.


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Journal homepage: 
www.remv-journal.com 
 
 
REAL ESTATE MANAGEMENT AND VALUATION - vol. 31, no. 1, 2023 
eISSN: 2300-5289 | Received 2022-07-07 | Revised 2022-08-11 | Accepted 2022-08-24 
55
 
A DECOMPOSITION APPROACH FOR ASSESSING LAND 
LEVERAGE AND DEPRECIATION RATE ON THE REAL ESTATE 
MARKET – EVIDENCE FROM WARSAW POLAND 
 
Joanna Waszczuk1, 2* 
 
1Collegium of Business Administration, Warsaw School of Economics, al. Niepodległości 162, 02-554 Warszawa, 
Poland, email: jwaszcz@sgh.waw.pl, ORCID: 0000-0001-9550-8605. 
2Narodowy Bank Polski, ul. Świętokrzyska 11/21, 00-919 Warszawa, Poland. 
* Corresponding author 
 
ARTICLE INFO 
ABSTRACT 
Keywords: 
Most property valuation research concerns entire properties consisting of land and structures. 
However, different features of land and capital as factors of production determine different 
patterns shaping their value and their different impact on the total price of real estate. In this 
article the hedonic decomposition model, which controls for differences in housing quality, is 
applied to decompose the price of an apartment into the land and structure components. The 
depreciation rate of housing was calculated and taken into account to properly isolate the 
dynamics of land over time. This allowed us to compare the house price index with the 
dynamics of land and structure. The empirical analysis was carried out on the data for the city 
of Warsaw. 
decomposition hedonic model, 
housing market, land leverage 
depreciation rate 
JEL Classification: 
R30, O18 
 
Citation: 
Waszczuk, J. (2023). A decomposition approach for assessing land leverage and depreciation 
rate on the real estate market – evidence from WarsawPoland. Real Estate Management and 
Valuation, 31(1), 55-68. https://doi.org/10.2478/remav-2023-0006 
 
1. Introduction 
The housing stock is undoubtedly one of the main 
components of a city's wealth and the wealth of 
households. As economic development grows, the 
importance of real estate markets as building capital 
and land that is involved in the production of goods 
and services, increases. Most of the related research 
concerns entire properties consisting of land and 
structures combined. However, there are a number of 
differences between land and capital and its dynamics. 
Understanding those differences is a very important 
topic in urban research.  
In the urban context, we usually deal with land 
already built-up with real estate. A characteristic 
feature of land prices and income from it, i.e. land 
rent, in relation to the prices of other factors of 
production, is that, in fully developed urban areas, the 
price is not directly observable. While the construction 
technologies and production costs are relatively 
homogeneous at any given time, land is characterized 
by an inelastic supply and specific features, including 
location and neighborhood effects (Malpezzi, 1996). 
Despite the lengthy construction process, buildings 
can be restored, so an existing building can be 
replaced with a new structure at a given cost. The 
expenses related to the implementation of such a 
project are mainly due to the productivity of the 
construction industry and the prices of certain 
materials. The value of land fluctuates with the 
economic and financial cycles; it tends to go upward 
in the long term, while capital depreciates. In the long 
term, as the economy grows, the capital resources 
increase, while the supply of land remains constant. As 
a consequence, the dynamics of land prices and 
building capital are different. Therefore, it is necessary 
to decompose the price of the property over the value 
of the structure and the land (Diewert & Shimizu, 
2016). 
Contrary to structures, land in urban areas does 
not depreciate. Aging, and more precisely the 
depreciation (house value decreases) may pose a risk 
on financial institutions management, as approx. 21% 
of GDP are housing loans in Poland, while this share is