Why Building a Lot of 'Affordable' Housing Is Bad News for Affordability

Cities become affordable when lots of new housing is built, not when a larger percentage of a small amount of new housing is made "affordable" by regulation.

Happy Tuesday and Happy New Year! With the cost of housing ever-present in the public consciousness, state legislatures reconvening, and elections out of the way, we can expect 2025 to be action-packed with lots of wonky housing policy fights. Rent Free will be here to cover them all.

As policymakers go about considering reforms aimed at making their cities more affordable, it's important to understand what success will look like. Even more importantly, it's important to understand what success does not look like.

To that end, this week's newsletter takes on the mistaken idea that building a high share of below-market "affordable" housing is a sign that a city is becoming more affordable.

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If a Lot of New Housing in Your City Is 'Affordable,' Something Is Off

On New Year's Eve, the Boston city government issued a press release touting the good work of its newly reorganized Planning Department at approving new development. The city reports that 3,575 net residential units were approved in 2024, of which a little over a third were "income-restricted."

That top-line number is not necessarily anything to brag about. Despite having some of the highest home prices and rents in the country, Boston is permitting fewer homes than less-expensive peer cities with equivalent populations.

Similarly sized cities like Washington, D.C., are building more housing than Boston. Atlanta is building way more housing than Boston.

Even more concerning than Boston not permitting a lot of new homes is how many of the homes it is permitting are "income-restricted."

Those are units (often also just called "affordable," "below-market," or "deed-restricted" units) that are reserved for lower-income residents and where rents are capped at steeply discounted below-market rates. Despite the city's celebratory touting of that figure, such a high share of new housing being income-restricted housing is very bad news.

That data point suggests that not only is Boston not building a lot of housing, but that it's vastly under-building what the market demands. It says most of the projects getting approved in Boston are either dependent on public subsidies or command such high rents that they can bear the cost of the city's punishing affordable housing mandates.

Understanding exactly why cities don't become affordable by raising the "affordable" share of the tiny amount of housing that they do build is crucial for getting housing policy right in the new year.

Filtering Up, Filtering Down

In a free market without subsidies and price controls, there wouldn't be such a thing as "income-restricted" units. All housing would be rented or sold at market rates for a profit (save for whatever housing is provided by charitable nonprofits and religious groups).

New housing would be pricey under such a system. But without zoning or other artificial caps on production, housing would still generally be affordable thanks to filtering.

Filtering is the process by which high-income people move into pricey, newly built units, lowering demand (and prices) for the older units they leave behind. Those units are then snapped up by lower-income people, who themselves leave behind an older, less-expensive unit to be taken by even lower-income people.

Studies that follow the filtering process down the income ladder find that the addition of new market-rate units kicks off a chain of moves that ends up leaving more units available in the most affordable neighborhoods.

Boston, of course, does not have a free market in housing. The city's zoning laws artificially restrict how much new housing can be built in the city. One measure of regulatory burden finds Boston has the strictest land use rules in the country.

A consequence of such strict regulations is that the natural market filtering process is thrown in reverse.

Absent new housing coming online at high enough rates to meet growing demand, high-income people stay put in their old units for want of better options. Units become more expensive over time, not less. Lower-income people economize by moving into older, worse housing instead of newer, better housing. People at the bottom rung of the income ladder either move out of town or move onto the street.

(If you want a more thorough explanation, see this piece I wrote about the housing economics of Taylor Swift concerts.)

Just One More Regulation

When filtering has broken down in a city, the obvious move for policymakers is to get rid of the zoning rules, permitting requirements, impact fees, taxes, mandates, and more that stymie new housing production.

Instead, cities like Boston have decided to fix the ill consequences of overregulation with more regulation.

Operating under the assumption that sky-high housing prices are just a force of nature (and not the product of overregulation), Boston created an "inclusionary zoning" policy back in the late 1990s.

That policy requires developers seeking waivers from zoning regulations to include below-market "income-restricted" units in their projects if they are building more than 10 units at a time.

Since Boston's zoning regulations are so restrictive, a high percentage of developers need to ask for zoning waivers to make their projects possible. A high percentage of newly constructed units in the city are "income-restricted" as a result.

Add in the affordable units that are built through federal, state, and locally subsidized housing programs and you end up with a third of new units being "income-restricted."

The city touts those affordable units as a policy success, when in fact they're plain and obvious proof of how overly burdensome the city's zoning regulations are.

If routine homebuilding requires waivers from the laws on the books, then the laws on the books by definition are killing routine homebuilding.

Even if Boston grants every waiver a developer requests in exchange for them building "income-restricted" units, the city is still costing itself new housing.

The voluminous research on inclusionary zoning policies finds that they're an effective tax on new housing that lowers housing production and raises housing prices.

For-profit builders need to make a higher rate of return on their market-rate units in order to make up for the tax imposed by "income-restricted" units. If the returns on market-rate units in a project don't cover the costs of the inclusionary zoning tax, then that project just doesn't get proposed at all.

That means that in Boston, fewer units overall get built and the market-rate units that do make sense to build are incredibly expensive.

Bad to Worse

Things are going from bad to worse in Boston. In October 2024, updates to the city's inclusionary zoning policy went into effect.

The pre-October regulations required that the builders of 10 units or more who received zoning relief make 13 percent of their new units income-restricted. The new policy requires all projects of seven or more units to be at least 17 percent income-restricted. They must also be restricted to incomes of at most 70 percent of the area median income.

This makes Boston's inclusionary zoning policy one of the most burdensome in the nation. One should expect the share of "income-restricted" units to rise as a percentage of new development going forward in Boston. The city will surely issue celebratory press releases when that happens, saying that their new policies are working. In the background, the overall number of homes will be falling.

As yet another example of more bad news presented as good, the city has launched a Housing Accelerator Fund to subsidize projects that are already approved and permitted but haven't started construction because of financial difficulties.

If a developer can't attract financing for already-approved housing in a high-priced, undersupplied city, something has gone very wrong indeed.

A Tale of Two Cities

In 2005, the Texas Legislature, responding to the concerns of Austin homebuilders, banned mandatory inclusionary zoning in the state. From that year on, Texas cities were prohibited from conditioning the approval of new, code-conforming housing on the inclusion of "income-restricted" units.

Affordable housing advocates opposed Texas' inclusionary zoning ban at the time and have continued to argue for its repeal on the grounds that inclusionary zoning is a powerful tool for creating affordability.

Yet 20 years later, it's Texas' megabuilding, inclusionary zoning–free cities that are relatively affordable and affordability-mandating jurisdictions like Boston that aren't.

According to the most recent rental data from Apartment List, median rents in Austin are $1,394 a month and have fallen 7.2 percent year-over-year. In Boston, median rents are holding steady at $2,298.

Boston might be the worst offender when it comes to bragging about how its policies are making things worse. But the policy preference for shrinking the amount of housing that's built in favor of boosting the percentage of housing that's "affordable" is a nationwide phenomenon.

California's state planning system is predicated on the idea that localities should mostly be building income-restricted housing. When they don't, politicians complain that they're overbuilding market-rate housing and call for greater subsidies and regulation.

Several states are now copying California's planning approach.

The Biden administration doled out new zoning reform grants, initially intended as an incentive for cities to repeal regulations on new housing, to cities that adopted inclusionary zoning policies.

In the past decade or so, a wave of inclusionary zoning requirements have been passed in Portland, New York City, Seattle, Pittsburgh, and more. Some of these are worse than others. All these policies implicitly accept the idea that we should sacrifice more housing for some additional "affordable" housing.

In states where inclusionary zoning is the norm, the policy hamstrings otherwise productive zoning reforms.

Bills that "upzone" land so that more units can be built are too often larded down with inclusionary zoning mandates requiring some (or all) of the newly legal units to be "income-restricted."

In effect, more housing is exchanged for less housing. Peter is robbed to pay Paul. The bad tradeoff of lower overall housing production for a higher share of "affordable housing" is extended into the future.

Aside from Texas, a handful of states have banned inclusionary zoning policies. More states should follow suit.

Housing becomes affordable when a lot of it is built, not when capital-A "affordable housing" makes up a larger slice of a tiny new housing pie.

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Quick Links

• The Wall Street Journal profiles the mixed-use Costco/apartment building development happening in Los Angeles that's made possible by recent state zoning reforms that allow streamlined approval of some residential projects in commercial zones. No longer are suburban big-box retail and urban walkability in conflict.

Costco is building apartments above its stores to address the affordable housing crisis, starting early this year.

Walking downstairs and getting a $1.50 hot dog gives new meaning to "affordable walkability."

It includes free membership, a rooftop pool, fitness area, gardens/… pic.twitter.com/28eBI4ORk2

— Andrew Lokenauth | TheFinanceNewsletter.com (@FluentInFinance) January 4, 2025

• Developers in Utica, New York, are asking the U.S. Supreme Court to take up their challenge to the city's seizure of their property. If the court does take up the case, it would give it the opportunity to overturn the infamous 2005 Kelo precedent that removed guardrails against eminent domain abuse, writes Reason's Jacob Sullum.
• Delaware's governor-elect is saying the right things about housing affordability while proposing some pretty modest state-level zoning reforms.
• Berkeley, California, has created an amnesty program whereby people can legalize their illegally built accessory dwelling unit (ADU). A recent study  looking at San Jose, California, found that most ADUs are built without permits.
• In California, an anti-LED light group sues over a plan to install a light display on the Bay Bridge in San Francisco, reports The San Francisco Standard. The suit claims the installation, far from being a beautiful addition to the city, will be "eye candy for a few private individuals who wish to use the public San Francisco Bay Bridge as their own personal playground." The anti-LED group is suing under the same environmental law that anti-development activists use to challenge the approval of tens of housing units a year.
• Even as New York City tries to goose housing production with liberalizing zoning reforms, the city's rent stabilization law is forcing more and more units off the market.
• Meanwhile, more cities in New York are taking the opportunity created by the state's new "Good Cause eviction" law to pass rent control policies of their own. Maybe supply and demand works differently in Rochester?
• A Maryland man is in hot water for building a go-cart track on his property without the proper permits. What's next, a permit to toast toast in your own damn toaster?
• Camping bans are proliferating in the wake of the Supreme Court's Grants Pass decision, which lets cities ticket people for sleeping in public even if there are no available shelter beds. Last week, Rent Free reported on how unsheltered homelessness in the United States continues to climb to record levels.
• Despite some last-minute legal maneuvers from New Jersey, New York's new congestion tolls went into effect on January 5.