A New Concept of Inclusionary Zoning

As we enter the New Year, I am reminded that a growing cohort of urbanists, progressives, and advocates are pushing for ‘Inclusionary Zoning’ provisions to be applied to new development. The concept is simple; in return for planning permission to develop your land, you must include a certain number of units (usually 10%) to be rented or sold at a below-market, affordable price.

The defense of this policy is that it will integrate income levels (which is noble), and that it will solve the affordable housing shortage (which is naive). Rather, if implemented as usually advocated, Inclusionary Zoning can serve only to increase the cost of housing. What is lost in the discussion of Inclusionary Zoning is whether developers, new homeowners, and new renters can bear the cost of the below-market units. This, in my opinion, is a grave mistake.

In it’s popular form, Inclusionary Zoning would shift the cost of affordable housing (entirely or partially) on to new development and in effect, the residents of new development. It makes philosophical sense to shift these costs on to new units— which are more expensive than older housing stock, and thus, are purchased or rented by higher income earners.

However, shifting these costs away from the general tax base to a select few who live in newer developments has consequences. For one, if we want to see a housing regime that allows more low- and middle-income earners to live in new accommodation, this policy will serve to prevent them from it. For example, if a development of 200 units includes 20 below-market units, the other 180 renters or buyers will have to carry the cost of those 20 units, which would likely be $6m-$10m (depending on unit sizes, finishes, etc). If you divide the cost ($8m, for this example) of the below market units, you are adding a burden of roughly $44,400 to each of the other 180 units.

The formerly $250,000 starter condo becomes $300,000. The cost of a months rent goes up $185 (based on $44,400 split over 240 months/20 years). The response to this is usually something along the lines of “the buyers/renters can afford it” or “it’s the price of living in a new building”.

And, while there are people who can afford a $300,000 condo or an extra $185 per month, the people who cannot have to struggle with an artificially reduced housing supply, thanks to the costs imposed by Inclusionary Zoning, which in turn further strains the supply of affordable housing.

Is it possible to make Inclusionary Zoning work?

Some Inclusionary Zoning advocates will contest that the integration of income levels is worth the cost, and the reduced supply of mid-market units. I do concur that integrating income levels in new development is a positive goal, however I do not think this goal necessitates the reduction of mid-market housing stock.

Rather, Inclusionary Zoning advocates would be prescient in a call to implement a supply-neutral Inclusionary Zoning policy that would see the City compensate builders for the unit construction cost of the units they take. Instead of squeezing “developers” (in truth, the eventual residents) for below-market units, the economics would be fair and the effects neutral to housing supply, should the cost of below-market housing be shifted to the City government, and thus the broader tax base.

Yes, this measure may require extra spending by the government on below-market housing. However, avoiding the negative externalities created by artificially increasing the cost of new housing are worth the increased cost to government. Especially when you consider the obvious, that when buyers and renters are pushed down-market, the competition for down-market units increases, the supply lowers, and the prices grow.

Instead of a half-baked policy of funding affordable housing, we need one that is spread equally and does not create unintended consequences. I believe that a supply-neutral Inclusionary Zoning program would meet these goals.

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