Inclusionary Zoning Makes Housing Less Affordable

The Sept. 3 passage by the state Senate of Assembly Bill 1229, which the lower chamber approved at the end of May, confirms one thing: that “inclusionary zoning” remains popular among government planners, politicians and activists despite decades of failure. Gov. Jerry Brown now has the opportunity to prevent this legislation from harming housing affordability.

Introduced by Assembly Member Toni Atkins, the bill authorizes California cities, towns and counties to impose mandatory inclusionary zoning ordinances as a way to promote more affordable housing.

Inclusionary zoning ordinances require builders to set aside a portion of a new development, typically 10 to 25 percent of the homes, to be sold at below-market rates to individuals with moderate, low, and very low incomes. The legislation “finds and declares” that, since the 1970s, inclusionary housing ordinances in more than 170 jurisdictions “have provided quality affordable housing to over 80,000 Californians,” including an estimated 30,000 units of affordable housing in the last decade alone. But that’s only half of the story.

Rather than wishful thinking, let’s talk economics.

Placing price controls on a percentage of new homes has one clear effect: It lowers builders’ profits from new developments. Thus, inclusionary zoning ordinances essentially are a tax on building new homes. And like any punitive tax, it has a predictable result: It reduces the supply of the commodity in question—in this case, new homes—while raising the price of the non-inclusionary units and the existing stock of housing.

Fellow economist Edward Stringham and I studied the effect of inclusionary zoning in California from 2003-2007 while we both taught at San Jose State. We found exactly what the laws of economics predict: Taxing new housing makes the vast majority of housing less affordable.

In the Bay Area, for example, we found that cities with inclusionary zoning ordinances imposed an effective tax of $44,000 on each new home. With the median cost of a new home at the time slightly over $500,000, this amounted to an approximately 8 percent increase. In Los Angeles and Orange counties, we found the effective inclusionary tax was $66,000 per new home—about 12 percent of the average median new-home price at the time (approximately $550,000).

Inclusionary zoning also decreased the supply of new housing, we found. After adopting inclusionary ordinances, we found that housing production on average decreased more than 30 percent in the first year in Bay Area cities. In Los Angeles and Orange counties, we found that housing production decreased 61 percent over a 7-year period following adoption of the zoning mandates.

Although the legislation touts the 30,000 units of affordable housing that were produced during the past decade through inclusionary mandates, it ignores the fact that the mandates reduced the growth of new housing by a far-greater number. In Los Angeles and Orange counties alone we estimate that during the period we studied more than 17,000 potential new homes were never built due to the inclusionary zoning requirement, while only 770 inclusionary units were added.

Politicians like inclusionary zoning because it allows them to champion affordable housing without having to directly raise taxes. But the new houses aren’t free. Someone must pay for them. That burden is borne by builders, land-owners, and other home buyers.

When he was mayor of Oakland, Gov. Jerry Brown understood that inclusionary zoning made housing less affordable. He had seen our research and in 2007 appointed me to Oakland’s blue ribbon commission studying inclusionary zoning. The city didn’t make the mistake that others had made.

Hopefully, Brown still understands the economics behind inclusionary zoning and will veto this counterproductive legislation.