Inclusionary Zoning Is Not The Boogeyman You’re Looking For

People express a wide spectrum of opinions on inclusionary zoning (IZ). Some say it’s the “beating heart” of affordable housing policy and critical to its success. About a month back, Evan Roberts wrote a Streets.mn article arguing IZ is terrible policy that will undermine affordable housing by increasing market prices and decreasing housing supply. That is what a libertarian economist might theorize would happen. But is it what happens? Stepping aside from the theoretical Econ 101 chalkboard and looking for real world examples of this boogeyman, it’s hard to find them. Of the two articles Roberts cited, one did not show the effects he claimed and the other was conducted by a suspect libertarian think tank and has been discredited. IZ policies haven’t always been successful in creating large numbers of units, but rarely are the dire side effect predicted found either.

My position is that IZ is an important policy to keep in cities’ toolbox to maintain income segregation and boost affordable housing in the most desirable areas. And yes IZ makes for good politics, as Roberts conceded, because a major obstacle to increasing housing supply is local homeowner opposition and IZ defuses the argument that new development is not affordable. So why pass on a valuable tool?

What is inclusionary zoning?

Inclusionary zoning mandates affordable housing units at a certain percentage (usually in the 5% to 20% range) in new developments in exchange for density bonuses (greater height limits and floor area ratio (FAR) requirements). In Seattle, the plan is to percentage of housing at between 5 and 7 percent and to define affordable as 60 percent of area median income (AMI).

HALAGraphic

In this illustration of Seattle’s pending mandatory affordability program, the red top floor on the leftmost buildings represents the density bonus gained through the MIZ program. (City of Seattle)

 

What was that about suspect libertarian research?

Roberts relied on suspect research to support a pessimistic view of IZ. Perhaps my progressive is showing, but I’m immediately suspicious of research by Benjamin Powell, who has worked at a libertarian think tank and has regularly appeared on Fox News. More substantively, he ignored long-held economic beliefs in the rush to discredit IZ. (Incidentally, Powell also wrote a book arguing for sweatshops.) In note 46 on the article sets a new definition of land as an elastic good despite the consensus among most economists, both liberal and conservative, that land is an inelastic good:

One of the only ways that inclusionary zoning would not affect quantity is in an equally unrealistic situation where the supply curve for new housing were vertical (or perfectly inelastic). In this case, suppliers (raw landowners) would bear the full burden of the tax. This is unlikely because it would require suppliers of raw land to supply the same amount of land to residential development regardless of what price they received.

It might sounds like we are getting into the weeds here with economic theory, but this is to show that the contention that IZ inhibits housing production is built on the shakiest of foundations. Counter-intuitively, landholders supply essentially the same amount of land whether the regulatory costs or taxes associated are low or high. This is due to land’s inelastic nature.

The other Contemporary Sociology article paints a more mixed picture than Roberts claimed it did. Suburban Boston did seem to see a decrease in housing production. However, the abstract describes: “There is no evidence of a statistically significant effect of IZ on new housing development in the Bay Area.” Thus the decrease in housing supply the theoretical models predict do not consistently happen in the real world. The Urbanist has done a more extensive survey of academic research and found that 4 of 5 articles found no negative effect on supply and the fifth was conducted by a libertarian think tank and largely discredited. By the way, one of the studies reexamined the suburban Boston data and found the negative impacts slight and only in the single family home segment.

Land Value Capture

I highly doubt developers are going to pass most of IZ costs to market-rate tenants. To say that IZ’s cost are passed onto renters ignores land value theory. IZ fundamentally changes the value of the land. At the least, two things can happen besides renters bearing the cost of IZ. First, the developers could bid less for the land cutting into the huge windfalls landowners are extracting for prime urban real estate. Second, developers could still bid nearly as much and eat the cost, since, as has been discussed on Streets.mn before, landlords do not set rents arbitrarily; the market determines the price, and a landlord will not charge more than the market will bear. Conversely, landlords rarely charge less than market will pay. Schemes that rely on cutting regulatory costs alone to lower the price of market housing run into this reality. And let’s not forget that the best practice is to link IZ to an upzone so that developers get something in exchange for participating: the ability to build more units which should make their buildings more profitable.

Scalability

Another criticism of IZ is that it can’t scale well or produce token amounts of units. It all depends how the program is set up. Some programs have been very poorly crafted and seen poor results. Others have been very successful. Mandatory inclusionary zoning created more than 14,000 units in Montgomery County, Maryland. The rate of creation dropped off after the year 2000 but still averaged 245 units per year between 2000 to 2013. To me, those are big results. Seattle expects MIZ program that aims to create 6,000 income-restricted units in the most amenity rich neighborhoods within the next decade. To me, those are big results.

Inclusionary Conclusion

The issues of housing and land economics are admittedly very complex. The research is sparse, and the results often aren’t conclusive. Nonetheless, I think there’s enough evidence supporting mandatory inclusionary zoning tied to upzones to implement the policy in booming cities struggling with affordability. Other policy interventions will be needed, too. But in lieu of a land value tax or something revolutionary like that we need to enact what is politically feasible in this moment. I’m glad my home city of Seattle was bold enough to enact MIZ. Not only will it build momentum behind upzones, it also should house 6,000 low income families in ten years. So my plea is this: don’t dismiss inclusionary zoning prematurely based on theoretical models rather evidence. If Seattle’s plan blows up in our faces, you can laugh at us then. But at least give us the benefit of the doubt.

 

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