Dwelling age, redevelopment, and housing prices: The case of apartment complexes in Seoul

The aging of a housing structure not only leads to depreciation but also increases the possibility of redevelopment. If redevelopment accompanies an increase in structural density in order to accommodate the increased demand for housing, it provides large capital gains to the existing owners. In this case, expectations of redevelopment in the near future and the eventual announcement of redevelopment plans can have a strong positive impact on the current price of housing. We test this hypothesis using a hedonic pricing model designed to decompose the age effects into depreciation effect and redevelopment effect. Based on 3,474 observations on apartments in Seoul in 2001, estimation results confirm our hypothesis. While the depreciation effect dominates the redevelopment effect until 15 to 19 years of age, depending on the specification, the redevelopment effect eventually dominates the depreciation effect thereafter, causing the apartment price to increase. At 27 years of age, the apartment price decreases by as much as 45 similar to 53 percent of the initial value, due to depreciation. However, the redevelopment effect increases the price by as much as 28 similar to 32 percent, driving the price up to 76 similar to 87 percent of the original value.