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Research Seminars & Workshops @ IRES


Professor and Director Kevin Fox
The University of New South Wales

Sunk Costs and the Measurement of Commercial Property Depreciation


Date:

30 October 2015 (Friday)

Time:

2.00pm - 3.30pm

Venue:

RMI Executive Seminar Room, 21 Heng Mui Keng Terrace, I3 Building, Level 4


Abstract

Developments in property markets greatly influence economic growth, monetary policy, productivity measurement, inflation measurement and hence welfare payments to the disadvantaged. Property price bubbles often lead to financial crises; those experienced during the 20th century were often triggered by commercial property price movements. Yet property poses significant challenges for national accountants in producing key economic variables used in informing policy assessment and formulation. To address these challenges, this paper formalizes a framework for measuring prices and quantities of capital inputs for a commercial property. In particular, it addresses problems associated with obtaining separate estimates for the land and structure components of a property, a decomposition of property value which is important for the national accounts, productivity measurement and taxation. A key contribution is to address the problem of estimating structure depreciation taking into account the fixity of the structure. We find that structure depreciation is determined primarily by the cash flows that the property generates rather than physical deterioration of the building. Finally, we provide a framework for the determination of the optimal length of life for a structure.

About the Speaker

Kevin Fox is a Professor of Economics in the UNSW Business School, and Director of the Centre for Applied Economic Research. He works primarily in the field of economic measurement, with a focus on productivity and prices. He joined UNSW in 1994 and served as Head of the School of Economics for five years, 2008-2012. He chaired the 16th Series CPI Review Advisory Group in 2009-2010, was a member of the Expert Working Group of the Australian Council of Learned Academies on productivity 2012-2014 that reported to the Prime Minister’s Science, Engineering and Innovation Council, and is a member of the Australian Bureau of Statistics Methodology Advisory Committee. He is an Associate Editor of the Journal of Productivity Analysis, a member of the Advisory Council of the Society for Economic Measurement, a member of the ABS Productivity Measurement Reference Group, and a member of the advisory council of the International Productivity Monitor.

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