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. We can’t share the benefits of development if we enact policies that make development infeasible, but the experience of most communities with inclusionary requirements is that developers continue to build.*

For cities where new market-rate housing development is occurring, usually the question is not ‘can we or can’t we feasibly require affordable housing?’ but rather ‘what level of affordable housing requirement can safely be supported, and how can we help developers offset their costs?’. The answer to this question depends very much on local conditions.

Economics of Inclusionary Housing

Affordable Housing Requirements

If affordable housing requirements are set too high, the concern is that developers may not be able to make sufficient profits, and they will choose not to build or to build in another community with fewer requirements.

Because landowners obviously can’t move to another community, they will have to lower land prices to attract developers – meaning that landowners are the ones whose profits ultimately drop. If land prices fall too far, landowners may decide not to sell – leading to a decrease in housing production overall. This reduction in the supply of new housing would, over time, increase the cost of housing – exactly the opposite of an inclusionary program’s intended goal.

While there is not much evidence of this outcome occurring at any significant level in real programs,* this is an appropriate concern that plays a central role in the debate whenever any community considers the right level of affordable housing requirements. Most communities address this risk by setting requirements well below the level that might negatively impact the supply of land for housing.

In a number of communities, economic feasibility analyses have been useful in helping policymakers get the details right and to build public support for an inclusionary policy. Typically, this kind of analysis involves staff or consultants researching development economics and demonstrating how much local projects can realistically support the costs associated with provision of affordable housing without adversely affecting construction or housing values.

Common Questions

Resources

Separating Fact from Fiction to Design Effective Inclusionary Housing Programs

Critics often claim that inclusionary housing policies are not effective at producing affordable housing and have negative impacts on local housing markets. However, the most highly regarded empirical evidence suggests that inclusionary housing programs can produce affordable housing, and that these programs do not lead to significant declines in overall housing production or to increases in market-rate prices. Read report

Policy Brief: Economics of Inclusionary Housing Policies: Effects on Housing Production

Effects on Housing Production addresses whether cities that implement an inclusionary housing policy will experience a decline in the production of new market-rate homes. The memo draws on an extensive review of the current theory and evidence in the economic research to answer this question. View Policy Brief

Policy Brief: Economics of Inclusionary Housing Policies: Effects on Housing Prices

Effects on Housing Prices addresses whether cities that implement an inclusionary housing policy will experience significant increases in the price of market-rate housing. The memo draws on an extensive review of the current theory and evidence in the economic research to answer this question. View Policy Brief

Policy Brief: Economics and Planning Literature on Inclusionary Housing Policies

The Economics and Planning Literature on Inclusionary Housing Policies lists key peer-reviewed studies from the economics and planning literature on inclusionary housing policies. In general, these studies address the market effects of both impact fees and inclusionary housing policies, including their effects on housing production, housing prices, and land values. For those key studies in this area, the document includes a short description of the authors’ findings and methodology. View Policy Brief

After the Downturn: New Challenges and Opportunities for Inclusionary Housing

This paper examines how inclusionary housing policies fared during the nation’s historic housing downturn, as well as the major issues and opportunities that confront inclusionary housing today. View Paper

Best Practices for Inclusionary Housing Feasibility Studies

This memo outlines the reasons municipalities should complete a feasibility study, the key components of a typical feasibility study, and Grounded Solutions’ best practices for designing and preparing inclusionary housing feasibility studies. View Memo