Depreciation: Auto and Real Estate

Depreciation can be defined as the decrease in an object's value over time. This lower value of an object, product or an asset may have many causes. One of the basic causes is the wearing out of an asset over time. Another cause of depreciation is the result of advances in science and technology that lead to the assets or products. Other than land, most, if not all, products and assets go through depreciation. The depreciation methods are usually either in the form of straight-line depreciation or declining balance depreciation. These forms of depreciation are more evident in auto, properties, and equipment.

Auto depreciation is one of the most noticeable forms of depreciation. In a car or a vehicle, the depreciation, the overall useful life of the car, is calculated through annual depreciation based on the car's make, model, and mileage. The higher the total mileage, the higher the depreciation expense. Even if the car sits in the garage mint in condition, it still depreciates because of advances in science and technology leading to vehicles with more features and better safety. The condition of the vehicle also affects the depreciation value of the vehicle. Most vehicles involved in accidents usually have a higher depreciation and insurance coverage even when restored to brand new condition by auto dealers and mechanics. Other factors like maintenance of the vehicle, safety, aesthetics, as well as custom additions to the vehicle, might contribute to low depreciation expense. For example, reupholstered leather car seats in a used vehicle will bring down the depreciation expense and increase the vehicle's value. Depreciation is proven to be the largest ownership cost over time. Auto depreciation is calculated in the form of straight-line depreciation. To calculate the auto depreciation expense, one must know the residual or salvage value of the vehicle at the end of its useful life, as well as the total useful life of the vehicle. This salvage value is subtracted from its original cost price and then divided by its total useful life. If calculating depreciation through mileage, the original cost, depreciation factor per mile, as well as the total mileage driven, are all considered. Many vehicles with longer useful lives have more mileage on them with less depreciation expense. This depreciation factor also affects the retail price of the vehicle, whether new or used, as well as Insurance coverage. Some antique and preserved vehicles retain high value as consumer demand in the antiquity market, pawn shops, and auctions goes up. However, road cars, in general, depreciate even though the customer demand for that vehicle might be increasing. These antique cars are usually a topic for road shows, car racing, television shows, etc, which means they are less driven on the road but more on display. Vehicles in general also depreciate as a result of corrosion. Door frames, power windows, and doors, hood latch, License plate bolts, trunk, and auto parts are all subject to corrosion. Hence, many vehicles are built with corrosion-resistant parts. Strong permanent odours in a vehicle as a result of low maintenance and aging interiors can also result in a depreciated car value. This is especially true of used cars. For example, a used car with a strong odour in the mats or upholstery may bring down the value of the vehicle. A strong odour usually means the car interior has to be treated with chemicals as well as re-upholstered with leather seats. Hence, the value of the vehicle is significantly low until reupholstered and treated with chemicals. Irregular oil changes and low maintenance leading to engine abuse also contribute to car depreciation.  Hence, auto depreciation is a major depreciation expense and an ownership cost.

  Property depreciation is resulting due to several factors. Some of the factors when considering real estate values are "Sustainable Sites, Water Efficiency, Energy and Atmosphere, Materials and resources, Indoor environmental quality, design innovations and regional priority (Ching, 2014)." Selecting sites that increase pollution with construction activity or sites that are inappropriate for development leads to property depreciation. Property constructed on soil with poor surface drainage qualities will result in basement and foundation floods, which not only bring down the value of the property but also severely risk damage and casualties. Buildings and structures built on low load-bearing soil capacity and soil shearing strength eventually lead to structure depreciation. Buildings and structures with limited availability of "utilities: water mains, sanitary and storm sewers, gas lines, electrical power lines, telephone and cable lines, as well as fire hydrants" (Ching, 2014) all lead to structure depreciation. Limited access to public roadways and transit stops also leads to structural depreciation. Buildings and sites that are inefficient in acquiring and using energy also lead to property depreciation. The heating, cooling and lighting of structures that lead to inefficient energy consumption and use translate into high utility and maintenance bills. For example, increased duct cleaning expense as well as heat and hydro bills that increase over some time with a property's age, will lead to property depreciation.   Poor indoor air and light ventilation quality, and improperly installed thermal comfort systems like spray foam insulation that lead to hazardous strong odour and high replacement costs for lumber and other building materials, lead to property depreciation. Usually, properties, whether residential or commercial, increase in value due to high demand. This demand grows as the accessibility to amenities like schools, colleges, hospitals, and shopping centres gets better. The growth of population and development of the area increase the real estate value. Renovating the property also increases the real estate market value of the property. However, faulty construction, maintenance or renovation blunders may lead to a decrease in the value of the property. For example, a property constructed on a loose foundation or sinkholes will lead to a depreciation of the property as it slowly develops cracks and decay. Many properties that exist on sinkholes often lose all their value as no investor is going to risk their investment and life on a property that will eventually sink beneath the ground surface! When properties are constructed without caissons and proper building materials on land prone to earthquakes, they lose their value over time. The depreciation expense, in this case, is usually directly related to the amount of damage done by natural disasters as well as the overall condition of the property. Construction that does not follow changed fire and safety codes may impose lawsuits and depreciate property value.  Improperly ventilated roofs and crawl spaces also add to the depreciation of the property. Since "the ventilation of concealed roof and crawl spaces is required to remove moisture, control condensation" as well as reduce fungus and strong odours, depreciation occurs if these conditions are not met! The Absence of windbreaks in areas with high wind velocity and less privacy reduce property value.  In tornado-prone areas, "the structure, components, and cladding of a building must be anchored to resist wind-induced overturning, uplift and sliding"(Ching, 2014). Though accessibility to airports and roads increases the real estate value, noise from airports or highways near a property will depreciate the value of the property as the population and noise level increase. Inaccessible parking spaces on a structure or the unavailability of parking spaces for vehicles used by persons with disabilities may depreciate the structure or building value even more. Hence, property depreciation results from many factors.

  In conclusion, many reasons contribute to the depreciation of auto and real estate. However, proper maintenance of vehicles, anti-corrosive parts and other vehicle modifications will reduce depreciation and retain car value for the auto trader market. Regular waxing and car paint upgrades will generally retain the shine of a used vehicle. Regular vacuuming and using air-fresheners on interior vehicle mats and seats usually help fight bad odours and so on. It also means car seats do not need to be reupholstered again and again, either as a result of blade cuts or cigarette ash. Fluid maintenance is another key factor in vehicle maintenance. Maintenance using regular oil change, coolant liquids and windshield wiper liquid is often regarded as a key factor in reducing engine and car depreciation. Many avoid buying vehicles involved in a collision due to their diminished value and high insurance. But if one is to buy a restored vehicle from a collision, auto experts recommend buying insurance policies that cover the entire value of the vehicle rather than a couple of grand less. Vehicle parts modification and adding emblems made of precious metals might also increase the value of the vehicle, depending on the precious metal charts in the stock market. Using apps and notes on vehicle mileage and maintenance may also reduce car depreciation. In terms of property value, waterproofing properties start with selecting sites with low slope elevations. Landscaping property perimeters with gravel and drains may reduce the chances of basement flooding and retain real estate value. "Sheet piling" near concrete retaining walls at the basement level may also help in stopping basement floods. "Resistance to lateral wind or earthquake forces requires the use of shear walls, diagonal bracing or rigid framing with moment resisting connections"(Ching, 2014). Water penetration must be controlled through the use of tooled joints, cavity spaces, flashing and caulking" (Ching, 2014). Construction that follows new building codes and fire safety codes is less likely to create legal issues and diminish the value of a property that might need complete reconstruction otherwise. Interior design also plays a key role. Designing floor plans according to the growing consumer market and market trends increases real estate value. For example, floor plans that have walk-in basements are more friendly to people with disabilities. Staircase railings used for chair lifts by people with disabilities may also increase real estate value. Wide staircases that allow easy moving of furniture, appliances, and equipment without wall and property damage may increase real estate value. Laminate and hardwood flooring that reflect wall paint may be a positive factor to consider in renovation. Wall paints and primer with fireproof coatings for walls, ceilings and outdoor deck may reduce fire flammability from barbecues, kitchen appliances, iron press or even cigarettes. Washrooms with bidets installed during renovations may increase property value as they are sewage-friendly and accommodate people with disabilities. Properly installed high-quality curtains that prevent the need for replacement due to elevation faults will avoid wall scars as well as repaint jobs, which in turn will maintain property value. Secured towel rod hangers and other types of wall hangers prevent wall damage as they come off. Security systems and smoke alarms in the basement also increase property value as a result of a low probability of fire and burglary. Concrete lawns and backyards, which save time on lawn mowing and gardening, may increase property value based on consumer demand. Overall, depreciation is and will be a major concern in both the auto and real estate markets. Awareness could be a good starting point for combating depreciation.

References

Ching, F. D. (2014). Building Construction Illustrated (5th ed.). Wiley.