Depreciation: a Dangerous Affair

Cozzi, Guido (2017): Depreciation: a Dangerous Affair.

Abstract

Statutory fiscal depreciation of real estates is typically higher than their realistic expected life. This would imply that markets would value buildings more than their social fundamental value. I prove that this allows house price bubbles to emerge and open the door to sudden crashes, even in an economy with fully rational and forward-looking individuals, and no credit market imperfections. I also provide a simple "rule-of-thumb" method to calculate the highest bubble-free depreciation rate. With standard parameters, it turns out that the usual annual 5% fiscal depreciation can prevent house price bubbles only by a very close shave.

• Item Type: MPRA Paper
• Language: English
• Keywords: House price bubbles; Fiscal depreciation; Sunspot equilibria.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location

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