What is Economic Depreciation?

Economic depreciation is a situation in which the value of property declines due to reasons that have nothing to do with the quality of the property itself. As a result of the depreciation, the property may no longer command the same price on the open market that it once enjoyed. This negatively impacts the ability to obtain a mortgage on the property, or even to borrow money using the property as collateral. Should the owner choose to sell the real estate, there is the chance that he or she may have to absorb a loss on the property if the economic depreciation is so severe that the market price drops below the amount originally paid for the property.

In many cases, economic depreciation involves little to no change in the integrity of the property itself. The buildings on a tract of land may still be as sturdy and attractive as ever, including all the benefits that were available for years, in terms of comfort, energy efficiency, and a host of other attributes. The depreciation comes about because a factor or factors that involve the area around the property has made the land less desirable, and thus less valuable to potential buyers.

There are two common reasons why economic depreciation of real estate takes place. The first has to do with a general decline in the area surrounding the property. This may occur due to a shift in the desirability of a residential neighborhood, sometimes caused by people of a given economic bracket choosing to move out of the area, opening the way for people in a lower economic bracket to move into the area. This type of change may also come about by the development of newer residential areas that attract the attention of buyers, either due to their proximity to shopping or business centers, or the general layout of the planned neighborhood. As a result, the lack of demand for real estate in the old neighborhood declines, which in turn forces down the value of the properties in the neighborhood.

Economic depreciation can sometimes come about due to changes in the zoning for a given area. For example, if an area was once zoned for residential use only, but the zoning is later changed to allow commercial enterprises as well as residences in the area, this may cause the value of certain properties to drop as big businesses such as factories replace tracts of houses. Thus, the rezoning makes the area less desirable for people who want peace and quiet at the end of the day, which in turn depreciates the value of those residential properties.