When Mandating Affordable Housing Makes Housing Less Affordable

A new study of inclusionary zoning policies in the D.C. and Baltimore metro areas finds that the policy ends up raising rents.

An increasingly popular idea for making housing more affordable might actually be raising rents.

So says a new study from George Mason University's Mercatus Center, which looked at the effects of "inclusionary zoning" in the D.C. and Baltimore metro areas. Such policies require developers to rent out a percentage of the new units they build at discount rates to low-income tenants.

These policies have been adopted by at least 886 jurisdictions nationwide. Sen. Elizabeth Warren (D–Mass.) has called for steering federal grants to cities that pass inclusionary zoning policies. Sen. Bernie Sanders (I–Vt.) wants to end state preemptions of local inclusionary zoning ordinances.

The hope is these mandates will improve affordability and equity without costing taxpayers a dime. But the reality is that they act as a tax on development, raising rents for most tenants and worsening the affordability problems they're meant to combat.

"Mandatory inclusionary zoning programs can be expected to increase prices by 1 percent per year that they are in place relative to what that jurisdiction could have expected without the mandatory inclusionary zoning," says Emily Hamilton, the Mercatus Center researcher who wrote the study.

Inclusionary zoning, Hamilton tells Reason, encourages developers to build more profitable but harder-to-lease luxury buildings, with the higher rents being used to recoup the costs of the below-market units they're forced to build. So more expensive units get built, raising prices for everyone not lucky enough to get a below-market rate unit.

How much these policies raise prices depends on a number of factors, including what percentage of units are required to be below-market, what income level they are targeted at, and whether the policies are mandatory or optional.

In Virginia, for example, Arlington County's inclusionary zoning policy requires only 5 percent of units to have below-market rate rents, while Fauquier County demands 20 percent. Some counties and cities require units to be affordable (meaning that rents don't exceed 30 percent of the tenants' income) to those making 50 percent of the area's median income. Others require that units be affordable to those making 80 percent of the area's median income.

Inclusionary zoning programs can avoid becoming a tax on development, but only when they are designed as an opt-in program where developers voluntarily agree to build below-market rate units in exchange for being allowed to construct larger, denser buildings.

"If your density bonus is valuable enough, it will encourage developers to voluntarily take advantage of the inclusionary zoning program, in which case we can be sure the program is not taxing development relative to the status quo," says Hamilton.

These density bonuses, she notes, are effective only when the density ordinarily allowed is significantly lower than what the market demands.

Because inclusionary zoning policies act as a tax on development, they usually do a poor job of creating affordable units. New York City's inclusionary zoning program led to the creation of only 172 units during the first 25 years it was in effect, the study notes. A much more effective way to make housing more affordable, Hamilton argues, would be loosen their restrictions on building new places to live.