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Inclusionary Zoning Is Rent Control 2.0

This article is more than 8 years old.

Despite prevailing in a few cities, rent control policies have declined across America, for reasons I mentioned in a previous post. They have been found—perhaps counterintuitively—to increase housing costs, by taking units off the market, encouraging abandonment by landlords, and preventing construction. While several cities still enforce rent control for older units, they don’t on newly-built ones, since even public officials now recognize the downsides. But this doesn’t mean that housing price controls have vanished. Instead, a supposedly more market-oriented solution has arisen to replace rent control, with results that are often just as bad. It is called “inclusionary zoning.”

IZ laws, while varying by locality, typically mandate that developers make a percentage of units affordable in exchange for building at higher densities. Other times, developers can pay into affordable housing funds or build affordable units elsewhere, in lieu of building them on-site. Such units are typically preserved for residents making up to 80% of area median income, and encompass 10-30% of a project’s overall stock.

In San Jose, where IZ’s constitutionality is being questioned by the California Supreme Court, developers building more than 20 units must make 15% of them affordable, or pay a fee of $122,000 per inclusionary unit. San Diego’s required affordability set-aside is 10% for developments with 10 units or more. New York City’s much-maligned “poor doors,” where different-income tenants enter separate doors within the same complex, were part of its IZ program. Altogether, over 400 U.S. municipalities have an IZ policy.

Such programs have become popular in expensive cities that struggle with gentrification and inequality. They are meant not only to increase affordable housing stock, but in a way that mixes the poor with the rich, rather than isolating them.  The term itself is a spinoff from “exclusionary zoning,” a longstanding de facto suburban policy wherein large-lot zoning is used to prevent low-income housing construction.

Most IZ laws are, technically speaking, voluntary. But in expensive and land-constrained markets, where building more units is necessary for a developer to achieve profit, IZ requirements might as well be considered a set business cost. Thus, they function like rent control once did, and, according to the academic literature, have similar downsides.

Indeed, studies show that IZ mandates both prevent new housing starts, and make market-rate housing more expensive. They prevent housing starts by acting as a tax on new development, thus making certain projects uneconomical; and because affordable units earn less, developers must cover losses by jacking up market-rate housing prices. In the study “Unintended or Intended Consequences?,” economists Tom Means and Edward Stringham define IZ as a price control, before noting that, like with other such controls, it discouraged production and raised prices in California.

“Between 1980 and 1990,” they write, “cities imposing below-market housing mandates end up with 9 percent higher prices and 8 percent fewer homes overall. Between 1990 and 2000 cities imposing below market housing mandates end up with 20 percent higher prices and 7 percent fewer homes overall.”

The authors suggest that rather than helping the poor, IZ has become a regulatory capture method that homeowners use to discourage construction and thus raise their own values.

Means’ and Stringham’s findings were complimented by a different study called “Housing Market Effects On Inclusionary Zoning,” which found that between 1988-2005, California cities using the policy saw price increases for single-family homes. A third study found that IZ contributed to price increases and lower construction rates in Boston.

These forbidding economics have prevented many programs from making a dent. Montgomery County, MD, pioneered a nationally-renowned IZ program that from 1976-2011 produced 13,000 affordable units, or only 282 per year in the fast-growing Washington metro area. The cost-of-living index for housing there remains well over double the national average. In ten years, New York City’s program produced 2,800 affordable units, a measly number in an 8.5-million-person city that issues tens of thousands of new housing permits annually. And by 2012, DC’s program failed to produce a single unit that was either bought or rented. Instead, the handful of units that were built sat empty, for reasons explained by economist Emily Washington.

“IZ units, priced to be affordable to those making between 50% and 80% of the Area Median Income, are not the most cost effective choice for many people in this income range,” she wrote for MarketUrbanism.com. “Potential beneficiaries of owner-occupied IZ units may not be able to qualify for a mortgage. IZ units tend to be one- or two-bedroom apartments. Low- and moderate-income DC residents may be able to find housing that is much more affordable than what IZ provides by living in a larger apartment with a roommate(s), in a group house, or with family. By attaching these affordable units to new, often luxury buildings, IZ siphons affordable housing resources to the type of housing where it will buy the least.”

A better alternative might be for cities to allow greater density without the price controls. The reason, after all, that housing is expensive in places like New York, San Francisco, DC, and other IZ-friendly (not to mention rent-controlled) locales is that zoning regulations prevent supply from keeping pace with population growth. In response, public officials have pursued demand-side solutions to this fundamentally supply-side problem, through a massive subsidy apparatus that includes rent-control, public housing, Section 8, tax credits, and now inclusionary zoning. Combined, these measures are band aids for a mortal wound, since they ignore the underlying cause of why hot urban housing markets remain expensive. And sometimes, by discouraging construction, these measures worsen the problem.

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