THE DESIRE TO BUILD REASONABLY priced housing for Americans is a noble and necessary mission. However, inclusionary zoning—mandates that require developers to sell a percentage of their new homes at below-market prices—is the wrong tool for the job. That fact is made remarkably clear in a new policy study entitled, “Do Affordable Housing Mandates Work?” The study makes a cogent case that inclusionary zoning regulations not only fail to create affordable housing, they actually make matters worse in the markets where they've been applied.

That's the conclusion of Benjamin Powell, Edward Stringham, and Adrian Moore after examining what happened in 13 Los Angeles and Orange County cities where affordable housing mandates were instituted.

The study, released by a division of the Los Angeles-based Reason Public Policy Institute, may draw criticism for coming from a think tank known for promoting pro-libertarian, free-market economy principles. The authors' independent findings, however, are well-grounded. If anything, the report would make a classic case study suitable for any Economics 101 course—one that even policy makers would find hard not to grasp. The study found that inclusionary zoning yielded:

  • Relatively few new units. In the 27 years that inclusionary zoning has been in place in the two California counties, just 6,379 affordable housing units were built (most of them in master planned Irvine). Factoring in the length of each program, the average jurisdiction managed to produce just 34 new affordable units a year from the time each adopted the policy.
  • High associated costs. In half of the jurisdictions, the cost associated with selling each inclusionary unit exceeded $575,000. That figure represents what economists call the “opportunity cost”—or what builders forego by selling at artificially imposed, below-market rates. This does not include the cost of producing the house. All told, the authors estimate, developers had to forego an average of $298 million, adjusted for inflation, in each of the 13 cities in order to comply with the mandates. Not exactly an incentive for developers.
  • Higher home prices. As everyone in business knows, real costs don't simply disappear because someone says they must; they merely get pushed, or more precisely, get added to someone else's costs—in this case, market-rate home buyers, landowners, and builders. This hidden tax, the authors calculate, amounted to a median increase of about $65,950 to the price of surrounding new homes—and as much as $500,000 in Laguna Beach, where new homes are already rare. This assumes consumers would bear the total cost; builders and developers, of course, might absorb a portion of that burden. Either way, the impact is high and relatively permanent.
  • Reduced total housing supply. Not surprisingly, a number of builders and developers walk away from projects with inclusionary strings attached, and fewer new houses get built as result. The numbers bear this out: Average production for all 13 cities studied fell the year following the adoption of inclusionary zoning rules. In eight cities where figures were available, 17,296 fewer homes were built in the seven years after adoption than in the seven years prior, though 770 “affordable” units were built in those markets. The authors raise the obvious question: Were those units worth the estimated $11 billion in new housing that never materialized due in part to inclusionary policies?
  • A loss of tax revenue. Lower assessed values on affordable housing units along with resale restrictions all come at a steep price to local governments in the form of lower tax and fee revenue. The study shows that inclusionary zoning cost Los Angeles and Orange Counties upwards of $750 million in lost revenues, based on present-value income accounting.
  • The conclusions are hard to argue and even harder to ignore: Price controls are expensive and they patently exacerbate the problem they were intended to address.

    The report is timely and important. According to its authors, an estimated 20 percent of California's communities now have inclusionary zoning rules—triple the number on the books in 1990. By the mid-1990s, as many as one in 10 cities with populations exceeding 100,000 had comparable affordable housing mandates.

    Affordable housing is a worthy goal. But communities would be better served if governments developed policies that encouraged, rather than restricted, housing production. Ending price controls and developing public-private partnerships would be a good start.

    Wyatt Kash, Editor

    Learn more about markets featured in this article: Los Angeles, CA.