What does the term "depreciation" refer to in property valuation?

Depreciation in property valuation refers to the reduction in a property's value due to various factors. This concept is critical as it recognizes that properties can lose value over time from causes such as wear and tear, outdated features, or changes in the surrounding area that may diminish desirability. Factors that contribute to depreciation include physical deterioration, functional obsolescence (where the property's design is no longer considered modern or desirable), and economic obsolescence (which relates to external economic factors).

Understanding depreciation is essential for valuators as it affects the overall assessment of a property’s worth, influencing investment decisions and taxation. By accurately accounting for depreciation, assessors can provide a more realistic valuation of property, reflecting its true market value and potential investment return. This understanding helps buyers, sellers, and investors make informed decisions in the real estate market.