Is Inclusionary Zoning Creating Less Affordable Housing?

[M II A II R II K]

Is Inclusionary Zoning Creating Less Affordable Housing?


APRIL 11, 2018

BY EMILY HAMILTON

Read More: https://www.strongtowns.org/journal/...rdable-housing

Inclusionary zoning — the requirement that real estate developers include below-market-rate units in new projects — has grown in prevalence in cities across the country since the 1970s. Fast growing and shrinking cities alike are turning to the policy with the hope of increasing access to housing for low-income households. But by making it more expensive to build market-rate housing, inclusionary zoning has the potential to reduce access to housing. Does this popular policy achieve the opposite of its goal to improve housing affordability?

- In a 1981 article, legal scholar Robert Ellickson explains that inclusionary zoning enforces rent control on the below-market-rate units and a tax on new development. Both of these forces can be expected to reduce housing supply, leading to higher prices for everyone who doesn’t get to live in an below-market-rate unit. --- Ellickson explains that the inclusionary zoning tax won’t actually be paid by developers; they will push it backward to landowners and forward to renters and homebuyers. Because new housing and existing housing are substitutes for each other, the inclusionary tax would increase prices regionally, not just in projects that include inclusionary units. --- Some developers also argue that inclusionary zoning creates incentives to build luxury housing that make it feasible for developers to subsidize their projects’ below-market-rate units. Inclusionary zoning's supply effects are therefore largest for modest new construction.

- While inclusionary zoning potentially reduces access to market-rate housing, it typically provides very few units for a city’s most vulnerable residents. Montgomery County, MD has the country’s longest history with inclusionary zoning. After having been in effect for 40 years, the program has produced one below-market-rate unit per one hundred residents. The units are designed to be accessible to households making $30,000 to $81,000 annually, so they do nothing to help the county’s least-well-off citizens. --- Some inclusionary zoning advocates argue that the policy should only be implemented up to the level until affordable housing mandates start making new development financially unviable. This logic misses the marginal effect of any level of inclusionary zoning. All affordable housing mandates will incentivize less development and skew new development toward luxury housing compared to what cities would see without these requirements.

Inclusionary zoning supporters argue that a few factors lead analyses like Ellickson’s to fail in the real world:

• Inclusionary zoning is often paired with density bonuses and/or tax credits to help offset the cost to developers of providing below-market-rate units. If the value of the density bonuses outweigh the inclusionary zoning tax, inclusionary zoning could increase housing supply and reduce market-rate prices relative to the status quo. Simply upzoning without an inclusionary zoning mandate could be expected to do more to increase housing supply and bring down average rents, but perhaps new density wouldn’t be politically feasible without affordable housing mandates.

• Relatedly, law professor Roderick Hills argues: “If cities must choose between unconditionally permitting new market-rate housing or unconditionally excluding it, then they are likely to choose the latter.” Perhaps the inclusion of affordable units helps individual projects make it through the politics of their cities’ entitlement processes. But if it were the case that affordable units help developers get the approvals they need to build profitable projects, we would expect them to provide these units even without a mandate.

• Supporters may acknowledge that inclusionary zoning is not a tool for increasing access to housing, but still support it as a way to increase socioeconomic diversity within a given area. It’s likely true that inclusionary zoning increases within-building income diversity relative to what we’d see without it. At the same time, if inclusionary zoning reduces supply and increases prices at the market-level, it could decrease that economic diversity at the city and regional level.

A few studies have estimated inclusionary zoning’s effects. They largely bear out the Ellickson’s basic economic analysis:

• Bento et al. found that inclusionary zoning in California caused prices to increase 2 to 3 percent faster relative to jurisdictions without the policy. They found that affordable housing mandates decreased the rate of single family home starts, but found no effect on multifamily housing supply. They write, “The results are fully consistent with economic theory and demonstrate that inclusionary zoning policies do not come without costs.” --- Tom Means and Ed Stringham also measured the effects of inclusionary zoning in California. They found that jurisdictions with inclusionary zoning saw their housing supply reduced by 7 percent and prices increased by 20 percent due to the policy.

• Schuetz et al. studied inclusionary zoning in two markets. In the Boston region, they found that inclusionary zoning rules reduced construction and caused higher house prices, but only during periods of rising prices. In the Bay Area, they found that inclusionary zoning corresponds with higher house prices during periods of rising rent prices, but that it also contributes to lower rent prices during times of falling average prices. They found no relationship between inclusionary zoning and construction in the Bay Area.

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[Pedestrian]

I don't see this as higher level math. If you artificially force down the price of some units in a new project, the developer is going to raise the price of the units he can raise to compensate. Density bonuses and so forth might help when those are taken advantage of, and the price increases in the market rate units aren't necessarily dollar for dollar, but often in a city like San Francisco the NIMBYs are so hostile to height, which is how density bonuses usually manifest, that many developers don't even try to use them.

[LouisVanDerWright]

^^^ Exactly, I've built and viewed proformas that have to take into account Chicago's ARO (Affordable Requirements Ordinance) that now requires 15% "affordable" units or a $150k payment into a fund per unit not built on site for any new development over 10 units that requires a zoning change.

This is not a difficult answer, the ARO makes new housing more expensive. It is treated as just another line item by developers who then either A. have to pay less for the land or B. have to charge more for the other units to make the proforma.

Here's the thing about housing, the price of construction is fixed, the price of financing is fixed, the only variables that change are the price of land and the sale or rental price of the product. If you make the sale/rental price of some units lower, then one of two things must happen, either the price of the other units has to go up or the price paid for the land needs to go down. The price of land typically doesn't go down since they aren't making any more of it. This is even more true in areas with a true shortage of housing supply. That means one thing will happen, the price of the remaining units will rise. If you somehow prevent the price of the remaining units from being increased (say through rent control) then developers will simply stop building. They don't even have the choice, if a project doesn't cash flow, the bank won't fund it, and it won't be built.

It amazes me how much bad housing policy exists and how easily verifiable it is that these "feel good" policies simply don't have the desired effects. I mean NYC and SF have both had rent control for decades and both are amoung the most out of control housing markets in the world. Clearly you can't just legislate lower rents, you just end up giving a small part of the population a totally unfair deal and then drive the price of everything not including in that portion of the market through the roof. This isn't hard to prove, it's as close to an Econ 101 supply and demand graph as you can come in real life. If you limit the supply of new market rate housing, then the price of existing housing will rise. If you put a price cap on a portion of the market, additional supply will not be added and you will have a shortage which means, shocker!, prices will rise for the remainder of the market.

[mhays]

Inclusionary zoning is loved by people who don't understand how the world works.

[DePaul Bunyan]

Supporters may acknowledge that inclusionary zoning is not a tool for increasing access to housing, but still support it as a way to increase socioeconomic diversity within a given area. It’s likely true that inclusionary zoning increases within-building income diversity relative to what we’d see without it. At the same time, if inclusionary zoning reduces supply and increases prices at the market-level, it could decrease that economic diversity at the city and regional level.

In other words, they just move the goalposts.

[C.]

I use to be a big believer in inclusionary zoning, but the author is correct. It's just driving up the cost of housing for all.

I also much prefer density bonuses over inclusionary zoning if it has to be done that way.

Inclusionary zoning = extraction
Density bonus = incentive, but it has to be a real incentive from the development community's point of view as often times it's an incentive/bonus in name only to the planners that wrote the code.

[CherryCreek]

It seems that most government efforts to manipulate real estate markets to assure "affordability" are doomed to failure. The end result seems to be you get cities full of very well to do together with a handful of lower income persons who "won the lottery" and get access to affordable housing, while other less lucky low and middle income people are chased away.

Invariably, for these type of issues, local governments come under intense pressure to "do something" and the something they do may have little prospect of having a positive impact but at least they've "done something."

If your objective is just affordable housing, the best solution seems to be to drive away investment, allow crime to rise, and encourage businesses to leave.

Any cities that fit that profile typically have incredibly affordable housing.