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Affordable Housing and the Dubious Promise of Inclusionary Zoning

It doesn't create much new housing and distorts the housing market, providing little if any help for low-income households. It's no substitute for broad liberalization of zoning policies.

Apartment housing under construction in California.
(Sundry Photography/Shutterstock)
Hundreds of cities around the United States have adopted “inclusionary zoning” (IZ) policies in an effort to meet their communities’ need for affordable housing. Inclusionary zoning can encourage residential developers to rent a portion of their new housing units at below-market rates by providing incentives such as looser zoning-code restrictions. In some cases, inclusionary zoning simply mandates a below-market quota for new apartment buildings above a certain size.

The appeal of inclusionary zoning to politicians is obvious: By enacting IZ policies, they can be seen to be doing something about housing crises without directly spending money from the municipal budget. Instead, the expenses of affordable housing are borne by developers — never a popular constituency and one that frequently gets blamed for causing gentrification.

But a look at the evidence and economic theory raises doubts about the usefulness of IZ. It seldom creates much affordable housing: Even a report by IZ supporters notes that the average number of housing units created by these policies per year is only 27. Moreover, IZ programs might produce broader distortions in the housing market that reduce or even cancel out its benefits for low-income households.

Basic economic theory predicts that if IZ programs reduce developers’ revenue, then fewer housing projects can be built profitably, reducing market-rate housing supply and driving up overall market prices. Such consequences would harm lower-income households for two reasons: First, in most cities, even most low-income households still pay market rents. And second, even new “luxury” housing can provide increased housing opportunities for lower-income residents: When affluent households move into better apartments, their old apartments are left open for other, less wealthy households to move into. Some recent research suggests that two new market-rate housing units could create about as much housing opportunity for low-income households as one dedicated affordable unit, and it’s quite possible that IZ policies reduce market-rate construction by much more than two units per one affordable unit created.

The empirical evidence on what IZ does to housing supply is more complicated. Many studies aren’t perfectly relevant to the challenges that central cities face now, because they look at suburban areas where most new housing takes the form of single-family homes on previously undeveloped land. But many studies do find substantial negative effects of IZ on housing markets. One such study, for example, found that California municipalities that adopted IZ in the 1990s saw 20 percent higher house prices and 7 percent fewer total houses — including both new construction and houses built before the 1990s — than comparable municipalities that didn’t adopt IZ.

There are several case studies, moreover, of large cities with IZ policies that significantly harmed housing development. New York City’s Mandatory Inclusionary Housing policy, an unusually demanding IZ quota that applies to almost all large housing developments, essentially froze housing redevelopment in lower-income areas such as the Bronx where housing construction was already marginal, according to one local real estate analyst. Most below-market units produced under MIH have been the result of 100 percent below-market projects that required hefty subsidies and tax credits. In Portland, Ore., one local observer has noted that new apartment projects just larger than 20 units, the minimum for that city’s IZ ordinance to apply, have basically disappeared, with a corresponding increase in projects just smaller than this threshold.

“Voluntary” IZ programs, which don’t mandate below-market units outright but promise favorable zoning provisions in exchange for providing them, have a somewhat better track record: A few policies that offer generous density increases in exchange for economically feasible below-market quotas have succeeded at providing substantial affordable housing in areas such as West Campus in Austin, Texas.

But they can also create perverse political incentives for affordable housing advocates to support policies that keep market-rate housing artificially scarce and expensive. In California, for instance, proposed state legislation would eliminate parking minimums for new housing near transit stops — a substantial obstacle for new housing development given the expense both of parking garages and of covering centrally located urban land with parking lots. This bill might seem like an obvious win for progressive environmental and housing goals, but a coalition of progressive groups opposes the legislation on the grounds that a broad elimination of parking minimums would remove municipalities’ ability to offer selective exemptions from parking minimums in exchange for below-market housing.

Inclusionary zoning may seem costless and politically convenient for local politicians, but its costs are quite real — and many of them, such as forgone property tax revenue and economic distortions resulting from high housing prices, ultimately harm the public treasury. And in any case, IZ produces too few units to be more than a minor part of an affordable housing strategy. There is no substitute for broad liberalization of zoning policy to lower market rents and housing prices, with all of the compromises and political fights that this inevitably entails.

Connor Harris is a fellow at the Manhattan Institute, where he focuses on infrastructure, transportation and housing policy.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
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