1# RECORD f7e86f195247c4fc151ec0afdcc5092a26e0583f2# TITLE: A Decomposition approach for Assessing Land Leverage and Depreciation Rate on the Real Estate Market – Evidence from Warsaw Poland3# YEAR: 2023.0 VENUE: Real Estate Management and Valuation DOI: 10.2478/remav-2023-00064# AUTHORS: J. Waszczuk5# PAGES: 14 CANDIDATE TABLE PAGES (1-based): []6# 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.789===== PAGE 1 (score 5, numeric-paren 0, table-words 0, var-words 5) =====1011 12Journal homepage: 13www.remv-journal.com 14 15 16REAL ESTATE MANAGEMENT AND VALUATION - vol. 31, no. 1, 2023 17eISSN: 2300-5289 | Received 2022-07-07 | Revised 2022-08-11 | Accepted 2022-08-24 185519 20A DECOMPOSITION APPROACH FOR ASSESSING LAND 21LEVERAGE AND DEPRECIATION RATE ON THE REAL ESTATE 22MARKET – EVIDENCE FROM WARSAW POLAND 23 24Joanna Waszczuk1, 2* 25 261Collegium of Business Administration, Warsaw School of Economics, al. Niepodległości 162, 02-554 Warszawa, 27Poland, email: jwaszcz@sgh.waw.pl, ORCID: 0000-0001-9550-8605. 282Narodowy Bank Polski, ul. Świętokrzyska 11/21, 00-919 Warszawa, Poland. 29* Corresponding author 30 31ARTICLE INFO 32ABSTRACT 33Keywords: 34Most property valuation research concerns entire properties consisting of land and structures. 35However, different features of land and capital as factors of production determine different 36patterns shaping their value and their different impact on the total price of real estate. In this 37article the hedonic decomposition model, which controls for differences in housing quality, is 38applied to decompose the price of an apartment into the land and structure components. The 39depreciation rate of housing was calculated and taken into account to properly isolate the 40dynamics of land over time. This allowed us to compare the house price index with the 41dynamics of land and structure. The empirical analysis was carried out on the data for the city 42of Warsaw. 43decomposition hedonic model, 44housing market, land leverage 45depreciation rate 46JEL Classification: 47R30, O18 48 49Citation: 50Waszczuk, J. (2023). A decomposition approach for assessing land leverage and depreciation 51rate on the real estate market – evidence from WarsawPoland. Real Estate Management and 52Valuation, 31(1), 55-68. https://doi.org/10.2478/remav-2023-0006 53 541. Introduction 55The housing stock is undoubtedly one of the main 56components of a city's wealth and the wealth of 57households. As economic development grows, the 58importance of real estate markets as building capital 59and land that is involved in the production of goods 60and services, increases. Most of the related research 61concerns entire properties consisting of land and 62structures combined. However, there are a number of 63differences between land and capital and its dynamics. 64Understanding those differences is a very important 65topic in urban research. 66In the urban context, we usually deal with land 67already built-up with real estate. A characteristic 68feature of land prices and income from it, i.e. land 69rent, in relation to the prices of other factors of 70production, is that, in fully developed urban areas, the 71price is not directly observable. While the construction 72technologies and production costs are relatively 73homogeneous at any given time, land is characterized 74by an inelastic supply and specific features, including 75location and neighborhood effects (Malpezzi, 1996). 76Despite the lengthy construction process, buildings 77can be restored, so an existing building can be 78replaced with a new structure at a given cost. The 79expenses related to the implementation of such a 80project are mainly due to the productivity of the 81construction industry and the prices of certain 82materials. The value of land fluctuates with the 83economic and financial cycles; it tends to go upward 84in the long term, while capital depreciates. In the long 85term, as the economy grows, the capital resources 86increase, while the supply of land remains constant. As 87a consequence, the dynamics of land prices and 88building capital are different. Therefore, it is necessary 89to decompose the price of the property over the value 90of the structure and the land (Diewert & Shimizu, 912016). 92Contrary to structures, land in urban areas does 93not depreciate. Aging, and more precisely the 94depreciation (house value decreases) may pose a risk 95on financial institutions management, as approx. 21% 96of GDP are housing loans in Poland, while this share is 97