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Wednesday, March 15, 2017

Zoning Harms Rich and Poor Alike

Inclusionary Zoning will ultimately raise prices for the middle and lower classes.

Inclusionary zoning is a hot item among urban planners today, and is often seen as a solution to residential segregation and high housing costs. Exact implementations vary, but the general idea is that developers of multi-unit housing projects are encouraged to set aside a certain percentage of their units, generally raging from 10-30%, but sometimes even more, as “affordable housing” units.

In other words, some proportion of the units are under rent controls to the point where they must be rented (or sold) at a loss by the developer. Sometimes the schemes are voluntary and give developers density bonuses, sometimes developers can pay a fee instead of setting aside units. The exact proportion of units that must be set aside and the loss that developers take on each unit also varies. As you can imagine, I’m not in favor of this system, but it’s a complicated issue.

Inclusionary Zoning

Inclusionary zoning (IZ) is a relatively new concept, first implemented in the 1970s, to combat the growing problem of residential segregation of classes and races, whose origins are interesting and, I think, germane to the conversation. I generally see two explanations given by proponents of IZ for why segregation and unaffordability arose in the first place: market forces and zoning (or, as they call it, exclusionary zoning). Quoteth a law review article:

Affordable housing has always been a problem in the United States. Cities and towns originally engaged in forms of discrimination through exclusionary zoning to exclude low-income residents.”

Of course, this is only true if your history begins in 1930. But from the mid-18th century to the turn of the 19th century, America underwent a tremendous urban population boom fueled by railed transit and a massive immigration wave from Europe, and the housing stock adjusted just fine – there was no affordable housing problem. On the zoning front, as well, the author is wrong: aside from the regulation of mass transit, there were very few zoning limits before New York City’s 1916 code.

While proponents are right that traditional zoning is indeed “exclusionary,” the name “inclusionary” always struck me as a little funny – you’d think the opposite of zoning out poor people through density requirements would be not zoning out poor people through density requirements, but instead IZ is essentially a form of rent control.

Rent control proper acquired a nasty reputation, and deservedly so – economists, regardless of their political persuasion, are united in their opposition in a way that you rarely see. But unlike traditional rent controls, inclusionary zoning is only applied to a portion of the units, and therefore isn’t as much of a burden on landlords. Furthermore, because the landlord still has some tenants paying market rents, they may have less of an incentive to let their buildings degrade to the point of literal collapse.

Expanding housing options for the wealthy benefits middle class and poor renters and buyers in the form of less competition for market rate housing.

Proponents claim that inclusionary zoning is an effective way to create affordable housing and income/racial diversity in otherwise segregated neighborhoods, but I see many negative unintended consequences. The fundamental problem that I see is that, while it definitely benefits those who are lucky enough to get affordable units (i.e., those with the most experience with the welfare state, who know how to work the system), it has negative net consequences for every single other person in the housing market.

The negative effects on fellow building dwellers are obvious: they will have to be charged higher rents in order to compensate for the loss that developers will almost surely be taking on the affordable units. While they theoretically could just forgo profits and break even, mandates are only implemented in high-cost markets in the first place, where 30% of the median income (or lower) is almost never enough to cover the expenses of even a unit with cheaper appliances and internal finishes. But new construction is almost always built for the rich, so people have a hard time sympathizing – although this is a mistake, considering the ripple effect on prices throughout the metro area.

Effects on the Poor

I think this concept of new construction vs. existing stock is worth dwelling on for a moment. One of the tenets of inclusionary zoning is that affordable housing should be “built.” But this is actually a pretty big departure from how housing for the poor has traditionally been done in America; as commenter jrab once put it, “Apparently rich people’s old housing is no longer good enough for poor people.” Which brings me to perhaps the most important point when it comes to rich people’s housing: it has enormous knock-on effects for the poor.

Someone who can’t afford real estate in Manhattan is going to go to Brooklyn in search of new neighborhoods to gentrify, which will ultimately raise prices for the middle and lower classes. Expanding housing options for the wealthy brings benefits to middle class and poor renters and buyers in the form of less competition for market rate housing, which is where the vast majority of them will be living.

Inclusionary zoning is itself sometimes a barrier to community support for dense development.

There is one possible exception to all this, and that’s when inclusionary zoning is voluntary and accompanied by density bonuses. In this case, the alternative is that the extra density simply doesn’t happen. But even here, there are caveats. For one, the long-term alternative is rarely no development at all. The affordability issue eventually became so much of a problem in Pennsylvania that the courts eventually forced municipalities to upzone for density – something I will contrast to New Jersey later on, when I discuss empirical evidence.

Furthermore, while IZ may originally be intended as only a “bonus,” it quickly becomes the norm, and no upzoning is allowed without it. The DC area Coalition for Smarter Growth, for example, has called for IZ in a GGW article in an area where the alternative was upzoning without the IZ requirements – clearly there are many who are interested in IZ as an end in and of itself and not just a politically palatable way to increase density.

And in fact inclusionary zoning is itself sometimes a barrier to community support for dense development, as wealthy white neighborhoods rebel against the idea of poor people in their midst – a problem that AvalonBay, which specializes in dense development in hard-to-enter housing markets, faced on Long Island. If IZ were only used to push through density that wouldn’t otherwise happen, I might not be so hostile to it, but that rarely seems to be the case.

Beyond Theory

In the end, though, a priori and theoretical arguments can only get you so far, and you have to look at the empirical data. Unfortunately, statistical analysis is very difficult given the confounding factors. For one, places that implement IZ policies are disproportionately wealthy and desirable and already have very stringent land use restrictions – affordable housing mandates don’t happen in isolation. Furthermore, they vary widely in scope. Plagued with statistical insignificance, these econometric analyses are not definitive either way, but here’s a sample of a few published recently:

  • Bento, et al.’s 2009 analysis found that California cities with IZ shifted the proportion of units in favor of multifamily units, but it appears that California jurisdictions place a bigger IZ burden on developers of single family units, which is the opposite of what I usually see throughout the US. They found little evidence that housing starts (the beginning of new house construction) were affected, but they did find that developers were passing costs onto consumers in the form of higher housing costs. The authors note, though, that the study was conducted during the housing boom, which could explain why housing starts were not affected.
  • Schuetz, et al.’s 2010 analysis found that suburban Boston experienced higher housing prices and fewer starts as a result of IZ during times of appreciation, whereas the San Francisco metro area experienced higher prices but not fewer starts during appreciation and lower prices during “cooler regional markets.” Magnifying booms and busts doesn’t sound good to me. The authors also note the prevalence of “de facto” programs – which I assume are similar to how NYC and Vancouver squeeze developers in an ad hoc way for concessions and amenities – which can complicate analyses.
  • Another paper by Shuetz, et al., published 2009, discusses the variation in IZ policies, and points out that Washington, DC exempts small projects and those in low-density areas. This means that buildings of expensive homes in ritzy, suburban-like neighborhoods in NW are not subject to the same kinds of costs that dense multifamily structures are.
  • Mukhija, et al. (2010) find that IZ works to a modest extent in providing affordable housing, without negative effects on the supply of market-rate housing. They come out strongly in favor of mandatory programs with density bonuses, but recognize that the bonuses are often unpopular with current residents. Like all other authors, they lament the poor quality of data available for analysis.

Control Group Comparison

Ultimately, though, all of these studies suffer from the issue of finding good controls. I have, however, found one “natural experiment” that I believe overcomes this issue quite well: the case of the Pennsylvania and New Jersey suburbs of Philadelphia. The Philly metro area spans both states, and indeed in 1970 both had housing stocks that were very similar in terms of the mix of single-family and multifamily units. But the two states’ supreme courts took very different approaches to the issue of the dearth of affordable housing.

New Jersey adopted a mandatory inclusionary zoning program through the Mount Laurel doctrine, whereas Pennsylvania gave developers what’s known as the “builder’s remedy” – essentially allowing them to override anti-density zoning regulations, but without the affordable housing mandates and subsidies of IZ (which reminds me – inclusionary zoning, on top of all its market impacts, often costs the government money). The two systems were compared in a 2004 paper by James Mitchell which is summarized in Jonathan Levine’s excellent Zoned Out, but here’s the abstract of the original article:

The municipal zoning process in the United States has come under increasing attack as a tool to create and maintain suburban socioeconomic homogeneity by mandating sprawl-producing single-family detached houses at the expense of less costly townhouses, apartments, and mobile homes.

Beginning in the 1970s, the Supreme Courts of the neighboring states of Pennsylvania and New Jersey addressed municipal exclusionary zoning in different ways: Pennsylvania empowered residential developers to compel municipalities practicing exclusionary zoning to authorize market-rate development of all types of housing, while developer empowerment in New Jersey was conditioned upon inclusion of low- and moderate-income units. Using aerial survey and housing census data over a 20-year period, this article finds that outcomes by housing type over a 20-year period in Pennsylvania municipalities around Philadelphia were more diverse than those in adjacent New Jersey municipalities.”

The fact that the result confirms my viewpoint may have biased me into thinking that the experiment is better than it is, so I encourage any pro-IZ people who think they’ve found better evidence to prove me wrong.

Finally, I’d like to point out that discussion of “inclusionary zoning” and “affordable housing” suffers from serious framing problems. Like “compassionate conservatism” and “enhanced interrogation techniques,” it’s hard to argue against something with such a nice-sounding name. Sometimes the language and idea of affordability and inclusion is even co-opted by developers using politics to argue for their harebrained eminent domain and massive public subsidy schemes – Atlantic Yards developer Bruce Ratner won ACORN’s support for the project by giving them millions and the right to manage the affordable housing units that were to be constructed.

Anyway, I apologize for the length of this post – inclusionary zoning is a beast of an issue, and I figured it was more important to put my thoughts in writing rather than to wait until I found a manageable way to deal with the topic without just writing whatever came to mind. But, there you have it – this is why I don’t like inclusionary zoning.

Reprinted from Market Urbanism.

  • Stephen Smith went to Georgetown’s School of Foreign Service and majored in international political economy. Smith went on to find a career in writing for the Market Urbanism blog, whose twitter handle remains his, as well as Bloomberg View, Next City, Forbes, the New York Observer, and YIMBY, a website that chronicles real estate from a pro-development angle. Source: Politico.