In Trimming the Abatement, Let's Not Create a Housing Slowdown

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The Controller's office's report on the 10-year tax abatement has a lot of good insights into the economics of housing in Philadelphia in 2018, and raises some important questions about the different scenarios under discussion for reforming it.

One of the big unanswered questions about Philly's housing economy, which this report begins to answer, was whether our rents and home prices are now high enough that our high construction costs don't matter, or at least don't matter as much.

The old chestnut is that Philly has Baltimore's rents and New York City's construction costs, leaving a gap between what residents can afford to pay for housing, and what it costs to produce housing. The point of the abatement has always been to paper over the gap with a back-door construction subsidy.

The question the Controller's office tries to answer is whether after several years of growth, rents and home prices are now high enough to make this a moot issue—at least in some areas of the city. What they found was that only in about 8 zip codes in greater Center City and Chestnut Hill does the development math pencil out for build-to-sell or build-to-rent construction, with or without the abatement.

This chart from Section 4 is especially useful for visualizing the issue:

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(Image: City Controller's Office)

According to the Controller's model, there are four zip codes where the development math would flip from positive to negative:

19148 (East Passyunk, Pennsport, Lower Moyamensing, Mifflin Square, Whitman)

19129 (East Falls)

19128 (Roxborough)

19115 (Far Northeast)

The South Philly example is particularly noteworthy since land prices have been going crazy there for years, according to the Lindy Institute. Home prices there are climbing faster than anywhere else in the city, so as Council considers the various abatement reform proposals, they need to be extra careful not to choke off the housing supply in South Philly.

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