Wrong-Headed Policy Makes Housing Problem Worse

Timothy L. Coyle
Consultant specializing in housing issues

Faced with a true housing supply and affordability crisis, local governments around the state are acting on impulse and adopting horrible policies.  Thinking they can arrest today’s escalating home prices and rising rents, they are enacting new “fix it” laws wily nilly, without considering their long-term consequences for underlying housing markets.  Single-family zoning restrictions, rent control and affordability mandates (inclusionary zoning) are among the worst, with the latter being the most popular.

Inclusionary zoning, as practiced in well over 100 communities in California, requires developers to set aside a certain percentage of the homes they build – usually 20 percent – to sell at below-market prices.  The aim of the creators of and advocates for inclusionary zoning is two-fold: 1) it will make certain newly constructed housing affordable to needy, lower-income families; and 2) there is hope that some of the traits and behavior of wealthier, market-rate homeowners will rub off on the assisted lower-income households.

Yet, despite a mountain of empirical evidence showing how inclusionary zoning leads to substantial price hikes and diminished production, the City of San Diego recently adopted a rigid new ordinance designed to do something to make housing more affordable.  In fact, it will do no such thing.

Indeed, since San Diego’s adoption at the turn of the century of a milder version of inclusionary zoning building permits in the City have plummeted. By its own admission, the region produced approximately 60,000 housing units less than what was needed over the last decade.  Developers there – responsible for building single-family, rental, condominium and mixed-use housing – have had their plans for new housing construction stymied or seriously constrained over the past decade by the old law.  Meanwhile, demand has surged.

San Diego’s answer?  Make the City’s inclusionary law even tougher than before.  The result is that little if any housing will be built that is affordable to lower-income families – the very households the law is supposed to help.

Inclusionary zoning does several things to the housing market – none of them good.  First, inclusionary zoning makes housing more expensive. Says Edward Stringham, PhD, of the prestigious Reason Foundation – the foremost expert on the concept in all of academia:

If they (housing developers) are required to sell some houses at prices below market rates, they will have to make up the difference by raising the prices of the other homes in the development.

Second, inclusionary zoning means less housing will be built in the communities where the policy exists.  That’s because its lower-income mandates make market-rate homes so costly to build the whole project no longer pencils out.

More from Stringham:

Economics 101 tells us that price controls like those imposed by inclusionary zoning will likely lead to less housing, not more, and may well reduce the amount of affordable housing available in the communities that need it the most.  And if that does not work, they can simply shift development to other communities where there are not inclusionary zoning mandates. Either way you get higher prices or less housing.

Third, inclusionary zoning is merely a benefit for a small group of “sweepstake” winners.  Only a random few get to buy one of the handful of homes that are available. A study in which inclusionary zoning advocates celebrated its findings showed an embarrassing low level of housing production – a total of 31,000 units over a 30-year period or a few more than a thousand price-controlled homes annually – a fraction of the need.

Fourth, most inclusionary zoning programs require buyers of a project’s below-market homes to sell them – when the time comes – to a second lower-income household at an affordable price.  Such a requirement saps the homes’ equity and acts as a serious disincentive to maintain or upgrade the property. Owners of these homes would be better off renting.

Fifth, the social engineering of inclusionary zoning – mixing lower-income families with wealthier homeowners – rarely achieves the desired results.  The impulse to experiment this way is based on the belief that lower-income residents do better when their surroundings (neighborhoods) improve. Indeed, some research shows that lower-income children benefit from moving out of high-poverty environs. But, other studies show that individuals who have a lower economic status suffer due to unfavorable social comparisons – often suffering discrimination or simply poor treatment by those further up the social ladder.

Lastly, inclusionary zoning wrecks local housing markets – chilling development and ignoring the power of vacancies, at the very least.  Local city councils need to respect that builders won’t build if they can’t make a profit and that there is nothing wrong with poor people occupying vacant, existing units.  Says researcher Emily Hamilton of George Mason University:

Over time,in a market where new construction is reliably delivered year after year, housing stock “filters” down as wealthier households move to newer units, leaving older homes available to the less wealthy.

In the words of former Governor Jerry Brown, speaking of inclusionary zoning, when he was mayor of Oakland and was determined to put housing downtown:

It’s not that easy to build . . . because when you go through it, you can go bankrupt in the process.  And when you finally have a plan and you get it all figured out, even though it barely pencils out, they tell you one out of every four of your prospective buyers or tenants should only play half of what it costs to build their units.”

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