How Affordable Housing Policies Backfire

Affordable housing policies have a long history of hurting the very people they are said to help. Past decades’ practices of building Corbusian public housing that concentrates low-income people in environments that support crime or pursuing “slum clearance” to eliminate housing deemed to be substandard have largely been abandoned by housing affordability advocates for the obvious harm that they cause stated beneficiaries. While rent control remains an important feature of the housing market in New York and San Francisco, even Bill de Blasio’s deputy mayor acknowledges the negative consequences of strong rent control policies. In the U.S. and abroad, politicians and pundits are beginning to vocalize the fact that maintaining and improving housing affordability requires housing supply to increase in response to demand increases.

While support for older housing affordability policies has dissipated, the same isn’t true of inclusionary zoning.  From New York to California, housing affordability advocates tout IZ as a cornerstone of successful  housing policy. IZ has emerged as the affordable housing policy of choice because it has the benefit of supporting socioeconomic diversity, and its costs are opaque and dispersed over many people. However, IZ has several key downsides including these hidden costs and a failure to meaningfully address housing affordability for a significant number of people. Shaila Dewan of the New York Times captures the strangeness of IZ’s popularity:

New York needs more than 300,000 units by 2030. By contrast, inclusionary zoning, a celebrated policy solution that requires developers to set aside units for working and low-income families, has created a measly 2,800 affordable apartments in New York since 2005.

DC’s City Center includes 92 affordable units. Image via Foster and Partners.

Montgomery County, a Maryland suburb of DC,  has perhaps the most well-established IZ policy in the country. After 30 years, the program has produced about 13,000 units. Montgomery County is home to over one million people, 20 percent of whom have a household income of less than $43,000 annually. While this is an extraordinarily high income distribution relative to the rest of the country, this makes the county’s median apartment rental of nearly $2,300 out of reach for many more people than even an aggressive IZ policy can serve.

While Montgomery County’s IZ housing does not reach a large percent of its population, it has provided many more units than other cities’ programs have. Washington, DC’s IZ law was passed in 2006, requiring developers to set aside 8-10% of units as affordable in all new projects with more than 10 units. As of the most recent 2012 report, DC’s IZ program has yet to reach a single beneficiary. The IZ units that have made it to market are sitting empty. This is in part because IZ units, priced to be affordable to those making between 50% and 80% of the Area Median Income, are not the most cost effective choice for many people in this income range, potential beneficiaries of owner-occupied IZ units may not be able to qualify for a mortgage. IZ units tend to be one- or two-bedroom apartments. Low- and moderate-income DC residents may be able to find housing that is much more affordable than what IZ provides by living in a larger apartment with a roommate(s), in a group house, or with family. By attaching these affordable units to new, often luxury buildings, IZ siphons affordable housing resources to the type of housing where it will buy the least.

Evidence on the benefits that mixed-income housing provides for low-income people is mixed, but it’s hard to deny that inclusionary zoning beneficiaries win a lottery. They live in new construction in desirable neighborhoods, housing that would cost several times as much at the market rate. However, IZ’s effects are not limited to beneficiaries, and its costs are not fully borne by developers. Because developers will lose money on the IZ units they build, this cost has to be made up in the market rate units in order for the project to go forward. This adds to construction costs and also incentivizes luxury units that can better absorb the cost of the IZ units relative to more affordable construction. While providing affordable housing to a few lucky low-income people, IZ also makes housing less affordable for everyone who doesn’t receive the benefit by reducing housing supply and skewing the market toward luxury housing that can subsidize the affordable units.

IZ appears free to everyone except developers because it’s not paid for out of city budgets. But ultimately housing consumers share in the cost of IZ units through a hidden tax. By making new construction more expensive, IZ also reduces the rate at which the prices of older or less desirable housing filters down to the point that it becomes affordable to low- and middle-income residents. Putting affordable housing in new construction ensures that it will benefit fewer people than the same amount of resources otherwise could. IZ supporters emphasize the importance of neighborhoods that are socioeconomically diverse but ignore the opportunity cost. Low-income people may be well-served by putting resources toward living in a diverse neighborhood, but this competes against many other places their resources could go, including investing in a business, pursuing education, or prioritizing nutritious food.

As economist Ben Powell explains, IZ can be designed not to have an effect on market-rate housing prices if developers are allowed to voluntarily trade the provision of IZ units for density bonuses. In that case the bonuses must be high enough to offset the cost of the below-cost units. However, as Stephen has pointed out, IZ creates an affordable housing lobby that opposes upzoning without affordability requirements. Eliminating IZ would put all housing affordability advocates on the same team. The same amount of resources currently providing for IZ units could be levied as a transparent tax and transferred to low-income people as cash rather than as luxury housing. This would also allow for resources to be distributed based on need, rather than giving a few households a jackpot.

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  • Luis Guajardo

    Provocative discussion on the current impact to communities although you lack quantitative rigor to make the argument that IZ leads to luxury housing. Most importantly, and what we should never forget is how the housing market abetted further income and racial inequality, prompting higher demand for AH today. For example, your history on affordable housing policies is a ‘false cause’ argument attributing the failure of public housing and current AH policies to thin air, apparently. The very same development community you’re defending (real estate and homebuilders included) resisted public housing standards through the Federal Housing Act of 1937 & 1949 so as to ‘not compete with the private market,’ sabotaging low-income housing for decades. Currently, we simply under-invest in affordable housing development (i.e. supply side and demand side approaches) while lucratively subsidizing homeowners earning over $100,000 through homeowner interest and property tax deductions.

  • stepthrough

    The potential issue of inclusionary zoning is in the “zoning” part, not in trying to include affordable homes in desirable parts of town. In most places, you have fundamentally exclusionary zoning – minimum lot sizes, FAR limits, minimum bedroom and square footage, and of course minimum parking requirements – all driving up the cost of housing and limiting the ability of the market to increase housing supply in desirable areas. Instead of the logical thing, which would be relaxing these limitations, the affordable requirements just get added on top of all these other requirements. If you allow the creation of less expensive units to begin with and then still can’t meet the housing needs of your citizens, that’s when you regulate or provide benefits…

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  • http://www.facebook.com/jibreelx JKR

    Something is off here because New York City is FULL in 2014 coupled with the always high demand for housing in the greater NYC area however unlike other cities that still practice endless urban renewal most of what is NYC will most likely be intact for the next 60 years.

    Planners like Robert Moses knew what to do in times like this: BUILD MORE PUBLIC HOUSING. you urban planner people types travel globally to know and understand the urban myths that are applied to American public housing however it’s becoming more clear and clear that the United States is headed for a public housing revival.

    Yes, a public housing revival.

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  • wgp2

    It would be nice if the author had done more research beforehand regarding how affordable housing came to be and the subsequent consequences of government policies that exacerbated the ‘ghettoization’ that resulted in many of the post WW2 housing developments, redlining policies set by the FHA and block-busting.

    I would suggest “The Urban Wilderness – A History of the American City” by Sam Warner as a primer to the policies put into place that affected how housing in America developed over time.

    Further still is the misunderstanding of how developers actually finance mixed-income and affordable housing developments (regardless of inclusionary zoning laws). Most developers that put in ‘affordable’ housing units within their development do so for the tax incentives / tax credits they receive from either the local, State or Federal housing authorities. Some municipalities require a % of affordable units in a development as part of the permitting process and zoning laws. In other cases, the developer leverages affordable housing tax credits on the open market and then monetizes that as ‘free money’ for the development. The market-rate housing units don’t float the affordable units like the author implies.

    In the case of DC CityCenter – which had heavy City support for redeveloping the old convention center site as well as tax incentives for providing affordable housing, the developer provided the bare minimum of ‘affordable’ units and rents the remainder at market value. In 2008 prior to the crash and rental bubble, market rate rentals in DC were going for $2-5/SF.

    Then the author makes specious claims like “Low-income people may be well-served by putting resources toward living in a diverse neighborhood, but this competes against many other places their resources could go, including investing in a business, pursuing education, or prioritizing nutritious food.”

    Actually, if the author takes off the ‘free market’ blinders for a moment, they could research more and find that mixed-income neighborhoods with affordable and market-rate housing prices don’t compete against the low-income person’s pursuit of education or access to nutritious food, they enhance access to such pursuits. The low-income family located in a mixed-income neighborhood has improved access to education, business and food opportunities. Instead the author seems to imply by ‘providing’ such opportunities via mixed-income developments the opposite occurs because, well, the market-rate paying person might bump into a low-income person in the same building or grocery store and feel like they’re being ‘mooched’ off.

  • http://marketurbanism.com MarketUrbanism

    @wgp2 In your skimming of the article, you seem to be mixing up the terms “people” and “person”, and in your kneejerk reaction you accuse the author of ignorance of housing economics, of which she is well-versed. Of course, affordable housing policies benefit persons (the lucky ones who get an affordable housing unit), but that doesn’t mean there aren’t consequences that spill over to the broader housing market. (the point of the article) I think a more careful reading of the article will inform you of the broader consequences of affordable housing policies and incentives, that likely outweigh the benefits to the few lucky beneficiaries of the units.

  • Green

    Whoa Market Urbanism, this is pretty vitriolic and biased. It also highlights problems with free market fundamentalism. You speak of “spill over,” well that is exactly the problem with free market ideas: we can’t start from an imaginary zero point of fairness. Also, there is a huge value judgement where your are valuing the housing of the more wealthy over the less wealthy in your spill over ethic. Also, how do you factor racism into your equation? Because, let’s be honest, this is what you are not addressing directly. White racism has created poverty for non-whites by preventing non-whites from gaining access to resources.

  • linstur

    I agree — giving a few people an awesome lottery ticket seems unfair and doesn’t solve the problem. There are so many better MARKET-based solutions. Micro-Housing is booming in Seattle — and has so vacancies – they can’t build them fast enough. The idea is affordable housing is affordable because it’s small (and also happens to be super-green). Renters pay the market rate and live in 400 square foot units with kitchens and bathrooms; and a shared full kitchen with a dining table and a big screen TV. Rent can be as low as $800/month – but it’s the market price. It’s the cheapest deal going and could absorb a huge chunk of the market. The government is never involved – and landlords have to keep the place clean and maintained if they want to keep people renting.

    What the government CAN do is make zoning easy and free. Pre-zone empty lots all over dense cities for Micro-housing (80 units can be built on the footprint of a single family home). Encourage these units, as well as granny flats.

    And most importantly – change our property tax system to encourage dense living and reflects the number of people living in a dwelling. A single man living in a 2000 square foot house should pay more than a large family with a rented garage. If renting out your garage cut your property taxes in half, and the zoning was non-existent (and fees were waived) – it would create a ton of low-income rental options.

    Government should take their affordable housing funds and match it towards freeing up red-tape and the ability for the MARKET to solve the problem – then see who wins the race.

  • http://marketurbanism.com MarketUrbanism

    Green, please be specify where I am biased – that would help me address my shortcomings.

    I believe you misread what I said about spillover. I stated that the *consequences* spill over to the broader market. The rich can handle it – it’s the less wealthy, immigrants, and others who want to move to that city who suffers. As I’ve advocated numerous times, the long-term solution is liberalization of zoning to allow for an increase in supply. Until then, only the lucky ones who already live in that city benefit.

    I don’t have enough information to address the “racism” remark, but to blame one race for the problem sounds like you fit the definition of racist…

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