On the House: Tax program linked to city's new homes

I've learned much from economist Kevin Gillen in the years he has provided me with data on this region's real estate market.

The most enduring lesson: It's more expensive to build a house in Philadelphia than in the suburbs or in comparable cities across the country.

At the behest of the Philadelphia Building Industry Association, Gillen took a look at the city's 10-year tax-abatement program, which is credited by many as the engine of the residential building boom of the last 16 or so years, and has been criticized for favoring the rich and Center City over the poor and other neighborhoods.

Philadelphia, Gillen says, has the fourth-highest cost of construction of any U.S. city: $128 per square foot, which is 25 percent above the national average. That $128 is less than construction costs in New York, San Francisco and Boston, but equal to Chicago.

The national average is $102 per square foot.

The household-income level in Philadelphia is 26 percent below that of the country as a whole, and 34 percent below the average of the high-cost cities of San Francisco, Boston, New York and Chicago, Gillen says.

"Thus, while Philadelphia has the same high cost of construction as these four cities, it does not have nearly the same high level of income that can cover the high cost of construction in these same four cities," he says.

"The abatement helps Philadelphia bridge the gap between its high construction cost and low sales prices by increasing the amount a buyer is both willing and able to pay for a home."

Before 2000, Philadelphia averaged 500 housing starts annually, while the suburbs had 9,500.

In 2000, the year that saw passage of the current abatement, housing starts surged 263 percent in Philadelphia but fell 9 percent in the suburbs, Gillen's data show. (By suburbs, he means Montgomery, Chester, Delaware and Bucks Counties, but not South Jersey.)

"Even during the recent recession and housing downturn from 2009 to 2011, housing starts actually increased by 64 percent in Philadelphia, while falling 8.2 percent in its suburbs," he says.

Since both city and suburbs share a regional economy and labor force and the same "macroeconomic conditions" - interest rates and credit availability, for example - "the data strongly indicate that the passage of the abatement played a primary and significant role in the surge of new housing construction in Philadelphia," Gillen says.

The data also show that while building between 1990 and 2000 fell 28 percent in the suburbs, it grew 177 percent in the city. Abatement "appears to have made Philadelphia more resistant to declines in building activity during the bust years," he says.

Forty percent of the abatements are for improvements to existing properties.

Under the city's AVI program, previously abated properties will immediately contribute an additional $10.5 million a year to property-tax revenue collections, and $70 million more after five years, Gillen says.

On the House: Town by Town

In the Sunday Business section, Alan J. Heavens takes a look at real estate and life throughout the region. This week's focus: Somerton.

Contact Alan J. Heavens at 215-854-2472, aheavens@phillynews.com, or @alheavens at Twitter.