Unveiling The Underlying Forces: Why Some Real Estate Depreciate Over Time

In the busy realm of real estate, as new buildings continue to emerge, the old ones undergo a tango of value and ageing. A grand old house, once the princess of the neighbourhood, now stands forlornly in its fading glory.

I encountered a wealthy man from Kuala Lumpur who invested in a property past its prime years. Many years ago, he purchased a multi-million dollar house, intending to live there with his children, but they chose to remain abroad. Despite its past glory, the value of his real estate has decreased over time.

Properties are more than just bricks and mortar; they are our memories, hopes and a legacy for our children. The market moves on from investments that do not appreciate, but each setback is a lesson. We must not repeat our missteps.

The March of Time

Let us first understand the key factors that can cause real estate value to depreciate: physical, functional obsolescence and economic factors.

Physical wear and tear

Inevitably, building materials age over time, and the once sturdy structure may require major maintenance work. Although the land remains unscathed, the building can lose value due to decay and damage to its structure and components.

It’s important to note that houses built on hillsides may require more maintenance and regular inspection.

Functional obsolescence

Dated or inefficient design, layout, or features of a property can cause a significant loss of value. A property with fewer bedrooms and insufficient parking may not appeal to larger families. Likewise, a poorly designed floor plan and small kitchen can make a property feel cramped and unappealing to potential buyers. Old appliances can also make a property less attractive, as buyers often look for modern amenities. Compared to newer or more modern properties, these factors can result in a loss of value.

Functional obsolescence diminishes appeal and, consequently, worth. Thus, identifying and addressing functional obsolescence is essential for maintaining real estate investments’ long-term value and viability.

Economic factors

This is the loss of value due to external factors that affect the property’s demand, desirability, or utility. A neighbourhood, market, economy, or environment change can decrease property value.

The winds of economy—they blow hot and cold. When there’s prosperity, property values pirouette upwards. But when recession knocks, they falter. Unemployment will cause buyers to retreat, and homes will linger on the market.

A neighbourhood should be a harmonious blend of houses, schools, parks, and cafes. But discordant notes emerge. Imagine a new high-rise sprouting next door, casting shadows on your house. Or perhaps a factory relocates, exhaling smoke and polluting the once-fresh environment. The neighbourhood’s pulse changes and property values sway to the beat of progress or decline.

Environmental factors—pollution, noise, and proximity to hazards such as being on the flight path—affect the neighbourhood’s desirability.

A splendid estate in a prime location

I visited the owner’s estate and noticed the reasons behind the decline of his house. Specifics are omitted to maintain anonymity. The house is over ten years old and occupies a built-up area of over 5000 square feet right in front of a serene lake in the park. Despite the estate’s prime location near retail outlets and shopping malls and the house’s premium status, the property’s value did not meet expectations.

A property portal indicates that the median house price in this estate is around RM3.3 million, with the upper range being less than RM3.5 million. The house was purchased for nearly RM4 million. Recent transactions and current listings suggest that acquiring a smaller but still spacious house here for less than RM3 million is feasible. A few were sold for less than Rm2.5 million.

Several years back, a new batch of houses—similar in size—was completed within the estate situated on higher ground. These hillside properties can command resale prices ranging from RM3 to 3.5million. A fresh wave of construction is underway for houses in the hilly area, with prices spanning from RM2.8 million to over RM3 million. These upcoming homes boast close to 4000 square feet of living space.

Over time, the stunning lake view that was once an asset to the estate became murky and unpleasant. This change in the environment and the fact that newer houses in the same location are being sold at lower prices has impacted the value of the premium houses directly facing the lake. Since purchasing other spacious houses in the park area for less than Rm3 million is possible, demand for the more expensive ones becomes weaker.

The size of a house alone does not determine its value. It is the layout and functionality that matter. Oversized bedrooms, bathrooms and non-essential areas are not always useful. They require more cleaning and maintenance.

In summary, environmental factors, market dynamics and newer developments affected the property values in this estate, shaping the prices of houses like the one described.

Final thoughts

The heartbeat of value lies in the location. A property near schools, parks, and that charming café where the barista knows your name—that’s gold. But stay away from noisy highways, toxic waste sites or factories emitting smoke.

There is hope for the house we previously discussed. The owner can take general measures to maintain and increase the property’s value. The most crucial step is to improve the quality of the lake water to remove its murky colour. As part of the improvement plans, the estate owners should also focus on enhancing the lake edges and beautifying the park. As not many houses face the lake, this property has the potential to become exceptional once again.

Before investing in properties, one should undertake comprehensive research and seek professional advice as many variables influence the real estate markets.

References:

1.Residential prices in the Klang Valley rise but at a slower pace | EdgeProp.my

2. Understanding Property Depreciation: Exploring How and Why Property Values Can Depreciate over Time (langfordjoneshomes.com.au)

3. Rental Income Tax Malaysia, And Other Tax Reliefs For YA 2022! (propertyguru.com.my)