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The Independent Institute
Commentary

New General Plan Proposal Will Not Make Housing More Affordable


The general plan proposal released by a coalition of Monterey community groups aims to make housing more affordable. The coalition’s consultant, Terrell Watt, claims that the plan includes “the strongest policies for affordable housing in the state.” But actually, the plan would raise typical new and resale housing prices at all levels, while reducing new housing prices for only a tiny number of lower income families lucky enough to win a lottery.

The plan’s main affordability tool is a so-called “inclusionary” zoning policy. This would place price controls on 25 to 40 percent of all new housing so it is affordable to people of low to moderate incomes. But these price controls reduce builders’ profit-incentive to build new housing. So total housing supply increases less than it would otherwise, which raises typical new and resale housing prices at all levels. The smaller the total housing supply is, the higher typical prices are; it’s that simple.

In San Francisco Bay Area cities, new construction fell an average of 33 percent when an inclusionary policy was adopted—an enormous drop, given that in most of these policies, price controls were placed on 10-15 percent of new housing. Watsonville adopted a 25 percent requirement in the early 1990’s resulting in no for-profit development for 10 years.

On the average, these cities each produce fewer than 15 affordable units per year, because the number of affordable units is a percentage of new housing built, which inclusionary zoning discourages. At this rate, inclusionary zoning can meet only 4 percent of the San Francisco Bay Area’s need for affordable housing.

Demand-supply logic and the experience of other cities suggest that in Monterey also, an inclusionary policy of even 40 percent would hardly make a dent in Monterey’s affordable housing gap.

To bring prices down, either the demand for housing must decrease or the supply must increase. To increase supply, Monterey should allow any new housing that can pay for its own services. Many of the new homes would be too expensive for people with low incomes. But because new and older housing are close substitutes, a larger supply of new housing decreases prices of both new and older housing. With more homes to go around, their prices would be lower for families of all incomes.

Of course, many people in Monterey do not want the large population increase that would come from building additional housing for all incomes. So policies could guide most of the new housing to low and moderate income buyers by making use of the facts that lower priced homes tend to be built at higher densities, or in commercial areas and upper floors of commercial buildings, or are constructed as town homes.

Commercial areas could be rezoned to allow residential development. Lot sizes as well as height restrictions could be changed to allow greater densities and row houses and town homes. Restrictions on building and renting back yard “granny flats,” and the rule that only family members, all, occupy them could be lifted.

Many groups within the coalition that created the proposed plan, such as the Sierra Club and Land Watch, are known for their opposition to new development. Inclusionary zoning, by discouraging housing construction, does effectively support goals such as preventing population increases, limiting congestion, and preserving open space. The tradeoff is that if housing is to be more affordable, its supply must increase, even though increased supply competes with other anti-development goals. Monterey County residents need to weigh the benefits of limiting growth against the benefits of home affordability. But groups should not use the false rhetoric of “housing affordability” on behalf of an entirely different goal: limiting new development. Low- and moderate-income buyers deserve better than that.


Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been Assistant Professor of Economics at San Jose State University, Associate Professor of Economics at Suffolk University, a Fellow with the Mercatus Center's Global Prosperity Initiative, and a Visiting Research Fellow with the American Institute for Economic Research. He is also the editor of the Independent Institute books, Housing America: Building out of Crisis and Making Poor Nations Rich.

Roger Folsom is a Professor Emeritus of Economics at San Jose State University and a resident of Monterey.