The Limits of Inclusionary Zoning

A new paper by Cassola (2021) examines the costs and consequences of inclusionary zoning policies across the globe. Does requiring a portion of new private, market-rate development to be set aside at limited prices for lower-income households actually improve affordability and economic integration? Though the data is difficult to parse, results appear mixed so far.

Key takeaways:

  1. Inclusionary zoning can be effective in specific regions and contexts, but can also have unintended consequences — such as raising the market price of housing, or destabilizing neighborhoods. It should be seen “as a complement to rather than a replacement for other federal, state, and local affordable housing programs.”
  2. Because inclusionary zoning depends on context-specific variables, these policies “must also be flexible enough to accommodate differing neighborhood dynamics and adapt to changing conditions.”
  3. Because it is a market-based tool intended to ameliorate certain market failures, policymakers should appreciate its limitations and “take a long-term and holistic view of how lower income households may be excluded or adversely affected by the policy.”

Inclusionary zoning may produce affordable housing in otherwise expensive urban markets, but it is difficult to assess how effectively these policies produce it, or in which neighborhoods, in absence of robust counterfactual testing.

Between 1974 and 1999, inclusionary zoning (“IZ”) produced 43% of deed-restricted affordable housing in the DC metro area; during roughly the same period (1980-2003), IZ produced 2.3% of all new residential construction in the San Francisco Bay Area. While it produced almost as much affordable housing as Low Income Housing Tax Credit (LIHTC) projects in some Southern California jurisdictions, other analyses found that inclusionary zoning produced far fewer homes than those that relied on the LIHTC.

In some cases, inclusionary zoning policies reduced residential segregation in urban areas. But in other areas, IZ produced more segregation by locating the housing in areas of concentrated poverty and segregation. This is possibly due to the fact that these neighborhoods had less political power to oppose housing development.

Cassola notes that “these outcomes illustrate a tension between the goals of promoting residential integration—at a higher cost—and maximizing affordable housing production.” The evidence is more sparse, but just as inconclusive, regarding the potential for these policies to reduce displacement of low-income households.

As with any well-intended initiative, policy design is important. Cassola identifies several key factors distinguishing various inclusionary policies:

  • Mandatory vs. voluntary compliance;
  • Form of affordability contributions (i.e. required on-site or in-lieu payment option);
  • Form of on-site affordable units (i.e. units for smaller or larger households, affordable units in same building or separate development);
  • Level of affordability (i.e. % of household income that limits prices, income tiers for moderate- and low-income households);
  • Scale of affordability (% of units required to be affordable);
  • Length of affordability terms (i.e. # of years that prices are restricted);
  • Incentives and cost offsets;
  • Qualifying projects (i.e. which developments trigger inclusionary requirements, and which are exempt).

Inclusionary zoning policies are difficult to compare because of the interlocking variables. Notably, 80% of the 500+ policies studied required less than 20% of units to be affordable, and 40% required it for fewer than 10% of units.

While not all policies included provisions for moderate-income households, subsidizing this income tier does have holistic benefits: “by subsidizing affordable units for moderate-income households, inclusionary zoning programs arguably free up public funds to create more or more deeply affordable units through other programs.”

These policies vary widely by jurisdictions, and are relatively rare in the United States. Some states prohibit inclusionary zoning in some forms, while others expressly permitted them. One survey even estimated that “almost 90% of localities with such programs are located in three states [California, New Jersey, and Massachusetts] with supportive frameworks.”

Additionally, inclusionary zoning requirements tend to be concentrated in jurisdictions that already have higher property values, with more rent-burdened populations, but not as prevalent in areas with relatively cooler demand. Cassola observes: “Property values are significantly and positively associated with the likelihood of having an inclusionary zoning program even when accounting for other contextual features, including housing affordability.” Demographic factors such as population density and educational attainment may also play a role.

All these factors need to be considered when developing and implementing inclusionary zoning policies, because their “reliance on strong markets also means that governments may have to revise their programs when demand weakens…” Otherwise, they “may therefore have unintended market consequences, including reducing the supply and increasing the cost of housing.”

The paper presents a broad comparison of different inclusionary zoning policies to make a strong case for careful program design and regularly re-evaluating outcomes.