One of the primary sources of formal opposition to the idea of inclusionary housing has been the Reason Foundation, a libertarian think tank based in southern California. Their research and opinion pieces consistently argue that high housing prices are the result of too much government regulation, and they see inclusionary policies as yet another requirement that adds to the cost of building. View website
Inclusionary housing does not make sense in every community. Even in some communities where it could work economically, it may be too controversial or too challenging to administer relative to the number of housing units it is likely to produce.
Some key challenges:
Even where it is well established, inclusionary housing has opponents who strongly believe that it is simply wrong for the public sector to regulate private development in this way. In some cases, opponents of inclusionary housing are otherwise supportive of local investment in affordable housing. In some communities, ongoing conflict over proposed inclusionary housing policies has been unnecessarily divisive and may have distracted from finding common ground on other affordable housing strategies.
Inclusionary programs involve an ongoing partnership with private property owners. Programs must carefully balance the public interest in creating affordable housing with the private owner’s need to profitably develop and operate their projects.
These programs require dedicated staff both to interact with developers before and during construction and to monitor homes and enforce program requirements over the very long term. In communities that are growing slowly, the number of new affordable homes that an inclusionary program will create may be too low to justify the administrative complexity involved.
Burden on Development
Inclusionary housing programs rely on new market-rate real estate development to fund the creation of affordable housing. In strong real estate markets, the cost of providing affordable units can be comfortably accommodated by otherwise profitable development projects.
The research suggests that the majority of the cost is ultimately born by land owners who receive lower prices for developable land then they would in the absence of inclusionary housing requirements. However, inclusionary housing is not free and there is a real risk that developers or land owners may find the costs too great and choose not to build. Because they are aware of this risk, most communities set their inclusionary requirements very carefully and monitor the results to ensure that the policy does not stand in the way of development.
Affordable housing advocates sometimes object to inclusionary housing programs that target units to moderate income households that, often, have other options in the housing market, rather than the low or very low income households that experience the most critical housing needs.
It is possible for inclusionary housing programs to serve very low-income residents but most don’t target this group. More deeply affordable units create a greater financial burden on developers, but some communities provide incentives to encourage developers to serve lower-income households.
Is Inclusionary Housing Legal?
Inclusionary housing programs generally rely on a local government’s power to regulate land use. While the right of government to use its zoning power in this way has been established and upheld for generations, this is still a rapidly evolving area of law and recent federal court decisions have limited this power in ways that don’t prohibit most inclusionary housing programs but can influence how they are designed. Continue reading
Will Inclusionary Requirements Have a Negative Impact on Development?
Growing cities value growth and want more of it. Policymakers understandably fear that affordable housing requirements that are too stringent will become a barrier to development, essentially killing the goose that lays the golden eggs. Continue reading
Yes: When housing prices rise, we all pay the price, but one group – owners of developable land and developers of real estate – receive the profit. Inclusionary housing programs recapture some share of the increase in land values to help the people who are most negatively impacted. Developers and property owners should certainly not be alone in addressing the need, but it is sometimes fair to expect them to bear some of the burden since they often receive financial benefits from rising housing costs. Inclusionary housing only ever provides a small share any community’s affordable housing opportunities. The vast majority of affordable housing is directly subsidized by taxpayers through federal, state and local government programs.
An economic feasibility study conducted by a qualified real estate economist can provide local policymakers with a clearer sense of how inclusionary housing requirements will impact the profitability of local development projects and the price that developers can pay for developable land. The economist will research local prices and rents as well as the key factors driving the cost of building. The economist will use this information to assess whether or not proposed affordable housing requirements would make typical projects infeasible. Any kind of feasibility study is necessarily somewhat imperfect, but the goal is to give policymakers a general sense of the likely impact of proposed housing requirements and incentives on land prices and development profits. Ultimately, a detailed feasibility study is the only way to address legitimate concerns about whether affordable housing requirements could do more harm than good.
Read more about conducting an economic feasibility analysis here.
No: Rents and home prices are set by a market. When a city imposes inclusionary housing requirements, it may increase a developer’s costs. But developers can’t really pass those costs onto home buyers or tenants because new units must still be competitively priced in the overall market. Instead, over time, land prices will fall to absorb the cost of the inclusionary housing requirements. Any incentives offered by a community would reduce the degree of land price reductions. Both theoretical and empirical economic research supports the conclusion that in the short term the costs associated with affordable housing requirements are born by developers and in the longer run they are passed on to land owners.
Possibly: There is some evidence that it is possible to set affordable housing requirements so high that they cause developers not to build or landowners not to sell. If this happens it can result in reduced supply of housing and ultimately higher housing prices. However, the data suggests that programs that provide incentives and flexibility can successfully require significant affordable housing without any impact on market supply or prices.
There seems to be agreement that inclusionary programs could theoretically diminish the supply of housing and therefore increase prices, but there is no agreement about how often this happens or how significant the impact is. A study by the libertarian Reason Foundation concluded that the production rate of market-rate homes fell following the adoption of inclusionary housing policies in Southern California.*
Basolo and Calavita* critiqued this study, pointing out that jurisdictions are most likely to adopt inclusionary housing policy toward the peak of the economic cycle, weakening the argument that inclusionary housing causes production to fall. A follow-up study by researchers at the University of California Los Angeles carefully compared the data for communities with and without inclusionary housing in Southern California. That study concluded that the adoption of inclusionary policies had no impact on the overall rate of production.*
The most rigorous study to date was conducted by researchers at the Furman Center at New York University,* who studied inclusionary programs in the Boston and San Francisco metropolitan areas. In the towns around Boston, inclusionary requirements modestly decreased the rate of housing production relative to nearby towns, and slightly raised the market price of residential real estate. In the San Francisco area, however, inclusionary programs had no impact on production or prices, suggesting that it is possible to develop inclusionary programs that don’t impact market prices. These same programs were also able to create more affordable units than their counterparts in the Boston area.
Probably not: Inclusionary housing relies on market growth to produce new affordable housing resources; it is not likely to be successful in communities that are not experiencing or anticipating growth. But inclusionary may not make sense for every growing community.
Smaller communities, in particular, sometimes lack the capacity to effectively administer inclusionary programs. Outsourcing and multi-jurisdiction collaborations could make smaller programs easier to administer by bringing together units from many local programs. But communities that produce very few units may find that the burden of administration outweighs the benefits of an inclusionary housing program.
Inclusionary housing may not be suitable in every type of housing market, but it can work in more places than many people realize. Inclusionary programs are tools for sharing the benefits of rising real estate values and, as a result, they are generally found in communities where prices are actually rising. In many parts of the United States, land prices are already very low, and rents and sales prices often would be too low to support affordable housing requirements even if the land were free. In these environments, policies that impose net costs on developers are unlikely to succeed (though some communities nonetheless require affordable housing in exchange for public subsidies).
Probably Not: Inclusionary housing is only ever one among several tools that cities deploy to address the dire need for more affordable housing and the full set of policies is not enough to meet the full need in most cities. But that is no reason not to do all that we can. Denver City Council member Robin Kniech says “no one ever says we shouldn’t pave the roads just because we can’t fill every pothole.”
While inclusionary housing is only one tool in the toolbox, it’s an important one. Nationwide, 258 inclusionary housing programs reported creating about 110,000 affordable homes. Also, 123 programs, some of which overlap with the 258 programs reporting units, reported collecting $1.76 billion in fees to use for affordable housing.
The way you design your program can make a difference in how many units it produces. While the average production rate across all programs is 27 units per year, excluding programs that have produced zero units, average production rate for the country’s top 20 programs is 235 units per year—almost 10 times greater (Wang and Balachandran, 2021). The most productive programs share certain features: they are mandatory, offer incentives, allow developers flexibility with multiple options for compliance, and require long-term affordability.
There are a number of options for states that do not allow cities to use rental inclusionary zoning. This situation usually arises because the legislature or a court has decided that inclusionary zoning is a form of rent control.
In some states—including Arizona, Colorado, Idaho, Indiana, Kansas, Texas, Tennessee, and Wisconsin—local governments are prohibited from adopting at least some form of mandatory inclusionary housing (for ownership housing, rental housing, or both). In some cases, the court has determined that the state statute limiting local rent control preempts mandatory local inclusionary housing requirements for rental housing. Many states—including Alabama, Arkansas, Georgia, Illinois, Iowa, Kentucky, Michigan, Mississippi, Missouri, and New Mexico, North Carolina, South Carolina, North Dakota, South Dakota, Oklahoma, Texas, Utah, and Washington—also have state statutes prohibiting local rent control but there has not been litigation regarding whether that statute preempts inclusionary housing requirements for rental housing. The specifics are different in all states so it is important to check with local attorneys, but there are a number of strategies that other jurisdictions have used so new rental housing development will contribute to affordable housing.
Charging Impact Fees
Many cities have adopted an affordable housing impact fee. Impact fees require that rental developers contribute money to an affordable housing trust fund. The size of the impact fee can vary dramatically, from under $1 a square foot to over $20 a square foot depending on local conditions. (Some jurisdictions charge a set price per unit, rather than per square foot.)
Before this can be done, a nexus study must be conducted.
Impact fees work well in areas with high home prices because the nexus study shows a strong connection. Cities with lower housing costs will only be able to legally justify a more modest impact fee level.
Some cities have set the impact fee as the default requirement and allowed developers to choose to provide rental units as an alternative. Because the default option is paying the fee and developers are choosing to provide the units, it may be more likely to withstand a legal challenge. When implementing the impact fee, it is a good practice to offer developers flexibility as well as incentives to participate. This will both make development more likely to happen and also reduce the likelihood of a successful court challenge.
In some states, it is possible to require affordable units when developers voluntarily enter into Development Agreements – generally as a result of receiving some specific public benefits.
Partnering with Housing Authorities or Nonprofits
States generally allow housing authorities, local governments, or nonprofits to operate affordable rental developments, even where rent control is forbidden. It may be possible to partner with these groups to ensure that all development contributes to affordable housing.
Boulder, Colorado requires that new rental developments provide affordable rental units on site or offsite, but the homes are owned by the local housing authority or similar agency so they are exempt from the state prohibition. The City of Boulder purchases the unit from the developer at an affordable price, and then sells or gives it to the Housing Authority or similar agency. Rental developments also have the option of providing a cash payment or dedicating land to the city.