There are a variety of market responses to inclusionary housing policies. In some cases, developers must reduce their profits in the short term. Under some special circumstances—such as in highly desirable and fast-growing housing markets—housing prices may increase. In most cases, however, land values will drop in the long term and developer profits will return to normal.
In theory, an overly burdensome inclusionary housing program could push land prices so low that property owners choose not to sell and development slows. While there is no evidence of this occurring to a significant degree under a real program example, this risk may nonetheless exist. As a result, cities may want to avoid this outcome by offering developers incentives to offset their costs.
In addition, it is important to consider the fact that at any given level of economic impact for a particular inclusionary housing program, there is a choice. Your city can (1) have a lower affordable housing requirement with few or no incentives or (2) a higher requirement with offsetting incentives. The higher requirement may allow the program to produce more affordable units.
However, incentives don’t come without their own costs. The most useful and sought after one, a density bonus, can nullify the legitimacy of area plans with considerable public input for example. Reductions in open space or parking requirements can reduce make projects less acceptable to neighborhoods reducing support for the program
