Inclusionary Zoning: A Plan for Higher Home Prices

(November 10, 2015)

In the policy debate on improving housing affordability, one idea often discussed is “inclusionary zoning”. It’s little wonder. Inclusionary zoning is a nice sounding idea that offers a simplistic cure to any housing crisis. Unfortunately, inclusionary zoning’s effect is the exact opposite to its intended goal, resulting in higher housing prices and rents, and discouraging new housing construction.

What is Inclusionary Zoning?

Most inclusionary zoning proposals include designating a set portion (15% to 30%) of new housing units in a development to be sold or rented below the actual market price. The goal is to create a new supply of housing that is more affordable than the typical price of new housing, which due to the high costs of land and construction, can be often priced out of reach for many low-income households.

What is defined as affordable? In many jurisdictions, such as in U.S. cities such as Boston or San Francisco, inclusionary zoning policies require the “set-aside” units to be priced so that they are affordable for households earning 80% to 120% of the local median income.

13% of these NYC units are inclusionary zoned as "affordable", subsidized by the other 87% of tenants who pay higher rents as a result. Source: Stephen Jacob Smith, "Return of Rent Control: Brad Lander and Candidates Push for Mandatory Inclusionary Zoning", Aug 16, 2013, Observer Real Estate.
13% of these NYC units are inclusionary zoned as “affordable”, subsidized by the other 87% of tenants who pay higher rents as a result. Source: Stephen Jacob Smith, “Return of Rent Control: Brad Lander and Candidates Push for Mandatory Inclusionary Zoning”, Aug 16, 2013, Observer Real Estate.

 

Inclusionary Zoning’s Negative Effect

While immediately creating housing that is priced less than the market price of new units, advocates of inclusionary zoning often neglect to consider the impact on housing prices and rents for those people who do not move into the set-aside units. In any inclusionary zoning scheme, the housing units zoned as affordable must be subsidized by the households and families who buy or rent the non-inclusionary homes.

For example, in a new 100-unit residential building, where 20% of the units are required to be priced affordably under inclusionary zoning, the remaining 80% of the housing units will be priced higher than what the market would dictate. Whether or not a residential development is under inclusionary zoning, the construction costs remain the same. In many big cities, the price of new homes and apartments is driven higher by scarcity of land and rising costs of labour and construction. Inclusionary zoning actually worsens affordability for most families by forcing them to subsidize any below-market units.

Under Inclusionary Zoning, the burden of higher house prices shifts to the market for existing housing, where it adversely impacts overall affordability, as shown in the above chart. The households unable to buy new homes as the result of Inclusionary Zoning (left graph) are pushed into the market for existing homes, where they drive up demand and prices for existing homes (right graph).  Source: National Association of Home Builders/ Paul Emrath Ph.D., “The Economics of Inclusionary Zoning” (2006)
Under Inclusionary Zoning, the burden of higher house prices shifts to the market for existing housing, where it adversely impacts affordability, as shown above. The households unable to buy new homes as the result of Inclusionary Zoning (left graph) are pushed into the market for existing homes, where they drive up demand & prices for existing homes (right graph).
Source: National Association of Home Builders/ Paul Emrath Ph.D., “The Economics of Inclusionary Zoning” (2006)

 

The Negative Impacts of Inclusionary Zoning Include:

  • A decline in the supply of new housing. According to a 2008 report by Altus Clayton[1], in the 33 cities in California’s Bay Area there were 10,662 fewer homes produced during the seven years after the adoption of inclusionary zoning, and the policy caused the price of new homes to increase by $22,000 to $44,000.
  • Average housing prices increase faster, making housing less affordable for the overall population. One study found that housing prices in cities that adopted inclusionary zoning increased about 2-3 percent faster than cities that did not adopt such policies.[2]
  • Inclusionary Zoning can artificially inflate densities by forcing developers to build more units and higher buildings than originally planned, in order to recover the economic costs of subsidizing below-market units. This can create unwanted or undesirable effects on surrounding neighbourhoods.
  • Negative outcomes for low-income households. Occasionally, the provision of affordable units in higher-priced or luxury-end buildings can result in low-income families facing costly amenities (high priced parking, child care, shopping) and may be located away from vital social services and employment opportunities.

It is possible that inclusionary zoning policies can be made more viable with significant government subsidies or financial incentives to developers. These incentives can include waived development charges or property taxes. Alternative solutions governments can consider include general incentives to secure more purpose-built rental housing, or diverting investment from social housing supply into income assistance for low incomes households, such as into a monthly housing benefit.

1 Altus Clayton, “The Potential Effects of Inclusionary Zoning in Canada”. Altus Group Limited, May 2008.
[2] Gerrit-Jan Knaap, Antonio Bento, Scott Lowe, “Housing Market Impacts of Inclusionary Zoning Programs”. National Center for Smart Growth Research, 2008.