Housing Policy

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.

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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.

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  1. And in an unexpected development, yet another study concludes water is wet, hot things burn you, and the sun rises in the east.

  2. So, if you force builders to rent some of their properties out at below market rates, those builders will then recoup that lost revenue by building more expensive and higher margin properties than they would have otherwise?

    No way. How stupid does one have to be to not understand this intuitively?

    1. That this even needs to be explained makes me lose hope for the future.

    2. this is also why full size pickups cost far more these days due to cafe milage requirements. the manufactures often loose money on the high milage cars they are required to build so they pass the expense onto the trucks that people often need to buy. I don’t need one for work but when it snows I’m the only one in the neighborhood who can get out. Luckily global warming will end the need in a few years

      1. That is a great example.

  3. not to mention how many luxury apartments don’t get rented because those who can afford Luxury apartments don’t want to have to walk by the cheaper units often occupied by lower cast criminals who might rape them at a moments notice. Sadly they do believe this and has been an issue where the cheaper units had a separate entrance and they sued for discrimination

  4. Inconceivable! Gov’t makes things more expensive by adding more levels of bureaucracy? That is just counter intuitive.

  5. Yet another sterling example of government restricting markets, then using the predicted consequences as a sign of market failure, and instituting new laws and regulations in an attempt to simulate the markets they have hamstrung.

    Prices are what make markets so efficient; government distortion or destruction of prices is what cripples markets.

  6. True story: Church wants to build inexpensive apartment house on its own land to be rented to those in need of temporary (1 yr or less) housing until single moms, etc. can get on their feet. Goes to Zoning Board and asks to build a 20 unit building. “Nope, too dense; you can only do 10 units.” But doing 10 units instead of 20 units raises operating costs to point where units aren’t affordable for most tenants. Solution: church members start advocating that politicians take taxpayer money to subsidize affordable apartments.

  7. In some California cities they reserve some below market units for our brave, underpaid and tireless public servants like teachers, cops and firefighters.

  8. A much more effective way to make housing more affordable, Hamilton argues, would be loosen their restrictions on building new places to live.

    We need to eat babies just to stave off climate change and this guy wants to start constructing buildings all over nature.

    1. eating babies would resolve the housing issue as well. But I don’t have any good receipies for babies.

      1. Look up “possum” in your cookbook.

  9. Rent’s too damn high!

  10. 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.

    In other words, we take away your property rights, then sell them back to you in the form of inclusionary housing. How is this voluntary? How is this not a tax on development?

  11. America already has “affordable housing units.”
    They’re located in wonderful places called “the projects” where people live in socialist splendor away from the capitalist excesses like crime-free neighborhoods, insect-free apartments, private schools, swimming pools, garages, etc.
    I’m sure we can all agree that anything the government makes is not only for our own good but for the betterment of all mankind as well.

  12. Gee, government adds costs to housing and it makes housing cost more. Go figure.

    1. And since it costs more, people can afford less of it, so “market failure” and more government intervention. Motto: “Impoverish yourself. Life is easier that way.”

  13. “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.”

    In SF, the politicos imagine the developer just goes out in his Jackson tree orchard and picks the Jacksons to make up the difference. In SF, the politicos are proggies, so you know they aren’t real bright.
    As an added benefit, given the BMR units are priced as a fraction of the ‘market rate’, it serves to raise the price of BMR units!

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