Rent control by any other name

Earlier this week, David Alpert wrote a piece at Greater Greater Washington on the benefits of inclusionary zoning and why economists should support it. I would counter that IZ as designed in DC is not an efficient program for providing affordable housing, and to the extent that it does provide significant numbers of price-controlled housing units, it will necessarily have many of the negative attributes of rent control.

IZ works by requiring developers to provide below-market cost units in addition to market rate housing, and providing them with “density bonuses” in exchange. The problem with this is that building more units in itself makes housing more affordable. Obviously I understand the many political obstacles to allowing more residential development, but I don’t think that introducing units that are permanently price-controlled is the appropriate price to pay for this political concession. As Walter Block writes at the Library of Economics and Liberty:

Economists are virtually unanimous in concluding that rent controls are destructive. In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93 percent of U.S. respondents agreed, either completely or with provisos, that “a ceiling on rents reduces the quantity and quality of housing available.” Similarly, another study reported that more than 95 percent of the Canadian economists polled agreed with the statement. The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the “right” to their fellow Nobel laureate Gunnar Mydral, an important architect of the Swedish Labor Party’s welfare state, on the “left.” Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”

Consumers and producers in the IZ market will face the same incentives that rent control creates, and the cost to developers of providing below market units will act as a tax on market rate units. Price controls on housing are of course wildly popular among those who are able to secure them. They are also popular among politicians because there is no better voter than one who owes his home to his elected official. By definition those who cannot afford to live in a city because of a housing shortage are not voters, so politicians need not consider their perspectives on IZ.

Many IZ units are owner-occupied rather than rental units. This gives it one advantage in that homeowners will have an incentive to keep up their home because they live in it. However they will not have an incentive to invest in it since they will never be able to sell it for above the IZ price. An effective IZ program will lead to the same shortages of market rate housing found under rent control, and developers will face every incentive to ensure that IZ units cost less to build than those they will be selling at market price. And a downside of tying IZ to homeownership is that this adds to one more government policy encouraging people to buy homes they may not be able to afford. The inherent risks need not be spelled out here.

In their paper Inclusionary Zoning economists Ben Powell and Edward Stringham ask, “If the government has the ability to offer subsidies or zoning exemptions that will increase the supply, then why must those policies be accompanied with a program that restricts the supply?” At present, IZ in DC probably doesn’t provide enough units to meaningfully affect market prices, but it also doesn’t help a meaningful percentage of the people who would like to live in DC but cannot afford to. The best we can hope for is that the program never manages to achieve enough “success” to bring with it all of the detrimental effects of rent control.

Whether or not IZ as implemented in DC will raise the cost of market rate units is an empirical question that is too soon to answer. I would guess that in the near term there are too few units to make a difference in the price of market rate housing, but this is also a sign the IZ is not helping a meaningful number of people find housing. In the longer term, IZ will result in more expensive and fewer market rate units in an already housing-starved city. Not a good idea in this urbanist economist’s book.

Permitting more development–much more–is the only way to provide affordable housing for those who demand it in DC. IZ has been framed as a way to bargain for this needed development, but it’s not going to provide the number of housing units needed, and it’s going to reduce affordability for many people who are unable to rent or purchase subsidized units. For those people for whom housing (and many other basic goods) are unaffordable, we can provide a combination of welfare and charity, but introducing price controls that won’t even help people at the bottom of the income distribution is the wrong path to take.