The Tradeoffs of Inclusionary Zoning: A Closer Look
Inclusionary Zoning (IZ), the practice of requiring home builders to set aside some units in new housing construction to be rented at below-market rates (BMR) to low-income households, is a popular strategy to increase the production of affordable housing while reducing or eliminating the outlay of public housing subsidies.
However, IZ comes with important tradeoffs – notably, lower overall housing production, as explored in a report that Shane Phillips recently released through the Terner Center at UC Berkeley: Modeling Inclusionary Zoning’s Impact on Housing Production in Los Angeles.
Key Takeaways
- Changing IZ requirements in Los Angeles has a significant impact on housing production. Higher IZ requirements lead to diminishing returns in BMR housing production, and substantial reductions in overall housing production.
- BMR units produced through IZ represent a large private subsidy of affordable housing. However, even small increases in rent growth in the unrestricted rental market can negate the value of these private subsidies.
- The study suggests that policymakers should focus on land use reforms to increase overall housing production and use other tools, such as increased public subsidies, to produce BMR homes and assist lower-income households.
Phillips’ report is based on analysis performed with the Terner Housing Policy Simulator, which overlays a real estate “pro forma” – the spreadsheet homebuilders use to determine the costs and potential profits of new housing developments – on top of parcel-level land use and regulatory data.
Using the Simulator, Phillips estimates the potential impacts of different IZ requirements on housing production in Los Angeles. His analysis focuses on areas eligible for Los Angeles’ TOC program, an incentive-based IZ policy designed to encourage housing development near transit, to illustrate the tradeoffs between BMR and market-rate housing production.
The findings reveal that increasing IZ requirements resulted in diminishing returns in BMR housing production – and substantial reductions in overall housing production. Completely eliminating the IZ requirement, while maintaining TOC bonuses, is projected to yield 398,800 homes over 10 years, 38 percent more than would be built with TOC’s 11 percent IZ requirement.
Increasing the IZ requirement from zero to 1 percent decreases market rate housing production by 71,400 units. At 17 percent IZ, market rate production is cut in half. Below market production is maximized at a 25 percent inclusionary rate; but each new subsidized home comes at the expense of 9 market rate homes.
Phillips also highlights the significant private subsidy provided by for-profit developers in producing BMR units. With a 16 percent IZ requirement, which minimizes the tradeoff between market rate and subsidized units, the Terner model estimated that developers would contribute approximately $1.4 billion in private subsidies for extremely low-income units over 10 years.
However, even small increases in rent growth in the unrestricted rental market could negate the value of these private subsidies. For example, additional rent growth of just 0.8 percent per year in the 16 percent IZ scenario would offset the value of private subsidies from IZ.
The report emphasizes the importance of carefully calibrating IZ policies to avoid unintended consequences, particularly reduced housing production resulting in higher overall rents. Phillips suggests that policymakers should make IZ optional and ensure that the incentives offered are valuable enough to offset the cost of providing below-market units. Further, other more cost-effective tools, like public subsidies, should be used to produce BMR homes and assist lower-income households.
While Phillips’ findings provide valuable insights, it is important to note that they are based on a modeling exercise and do not represent actual production numbers: future housing production in Los Angeles will depend on various policy, economic, and political factors.
In conclusion, the report highlights the tradeoffs associated with IZ policies and emphasizes the need for careful consideration when implementing such policies. While IZ can produce BMR housing, it comes at a steep cost in reduced overall housing production and increased market rate rents. Policymakers should focus on a balanced approach that combines land use reforms with increased public subsidies to address the housing affordability challenge more effectively.