Real estate markets are constantly changing. While inclusionary housing programs are often flexible and adaptable, they can’t respond to each and every change in the market. Some communities have increased their inclusionary requirements during housing booms and reduced them or waived them entirely when their markets crashed. However, it is in general difficult for cities to time the market and adjust their inclusionary requirements every time their housing markets change.
A few cities temporarily repealed their inclusionary requirements during the most recent downturn in order to avoid over-burdening projects during a fragile period. But most programs did not feel that this was necessary.* While it is far more difficult for projects to support housing requirements during a downturn, most projects wouldn’t move forward in these times even without affordable housing requirements. Waiving requirements temporarily does little to promote development, but it risks missing the opportunity to produce affordable units when the market unpredictably returns.
It is possible that these temporary waivers helped speed up the market recovery in these cities, but it did so by permanently exempting certain projects that would have been built slightly later without the waiver.
When the market is soft, cities don’t waive fire codes or other zoning requirements, even though they too could help some projects pencil out sooner. Instead, they wait for the market to recover because these are appropriate minimum standards. If housing requirements are modest enough that they are not economic barriers to development most of the time, there should be no need to adjust them for market cycles. On the other hand, if a community experienced a permanent change, like the loss of a major employer that changed the likelihood that rising housing prices will ever again be a challenge, then certainly adjustments to affordable housing requirements would be appropriate. Some communities plan on comprehensive reviews of their policies every 5 years including an analysis of whether inclusionary requirements remain appropriate given longer term economic trends.
For programs with in-lieu fees or housing development impact fees, frequent review and adjustment is important. Many cities have written specific dollar amounts into their ordinances for these fees. Over time, a fixed fee will drop relative to inflation and relative to the cost of providing affordable housing. Some communities have managed to keep their fees up to date by having their council annually approve a change to the fee calculation. However, because this is a controversial issue, these annual approvals can be challenging. In response, a number of communities have indexed their fees to allow for regular increases (and potentially decreases) in response to changing market conditions. For example, San Francisco increases its in-lieu fee schedule annually based on the change in the Engineering News Record Construction Cost Index for San Francisco. Other cities tie fee increases to changes in the Consumer Price Index or a local housing price index.
