Emily Hamilton is a Research Fellow for the State and Local Policy Project at the Mercatus Center at George Mason University. Her guest article today focuses on the unintended effects of an affordable housing policy. Refer to this housing lexicon we recently put together for definitions on several of the terms used below.
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?
The Economics of Inclusionary Zoning
As its name indicates, inclusionary zoning is framed as an antidote to exclusionary zoning that has shut low-income households out of expensive neighborhoods and cities. It seeks to achieve this by mandating that developers subsidize new housing for low- and middle-income households. By itself, inclusionary zoning does nothing to address the exclusionary policies that came before it, and it increases the cost of building market rate housing.
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.
Does this theoretical economic analysis hold up empirically?
The land use entitlement process is complicated. 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 (that is, increasing the size of buildings and amount of units allowed on a given site) 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.
Measuring the Effects of Inclusionary Zoning
Given the potential for real-world inclusionary zoning policies to cut in favor of both more and less housing construction, its effects on supply and price need to be tested empirically to determine its overall effect. This is difficult because of the challenge of gathering data on municipalities’ ordinances, but 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.
While inclusionary zoning provides large benefits for a small number of low- and middle-income households, most empirical evidence indicates that it drives up prices for others and reduces access to housing overall. The policy’s emphasis on providing below-market-rate housing in new construction that’s identical to market rate housing means that resources dedicated to social housing won’t go as far — or be distributed as equitably — as they could be if they were targeted to low-income individuals as housing vouchers or cash.
(Top photo source: Brandon Griggs)
About the Author
Emily Hamilton is a Research Fellow for the State and Local Policy Project at the Mercatus Center at George Mason University. Her work focuses on urban economics and land-use policy. Hamilton has authored numerous academic articles and policy papers. Her writing has appeared in USA Today, the Christian Science Monitor, Economic Affairs, and the Philadelphia Inquirer. She contributes to the blog Market Urbanism. Hamilton is a PhD candidate in economics at George Mason University. She is an alumna of the Mercatus Center’s MA Fellowship at George Mason University. She received her BA in economics from Goucher College.