OAKLAND, Calif., Nov. 12, 2007—Affordable housing shortages are a national crisis. City governments from Los Angeles to Chicago are responding by pushing for a policy of “below-market housing” or “inclusionary zoning.” But what kind of track record has this policy had since its inception in the 1970s?
In a new report from the Independent Institute, Below-Market Housing Mandates as Takings: Measuring their Impact (November 2007 / The Independent Institute), Research Fellows Tom Means, Edward Stringham, and Edward Lopez reveal that not only does “inclusionary zoning” fail to make housing more affordable; it discourages development and ultimately increases prices.
According to a plan in Marin, Calif., for example, anyone wishing to develop their property would have to sell or lease 50-60 percent at below-market rates, which must be made affordable to households earning 60-80 percent of the median income—resulting in a sale price of approximately $180,000-$240,000. When compared to the conservative median sale price of $838,750 (and homes in Marin typically sell for much more), revenue from a ten-unit project, with 50 percent price-controlled at 60 percent of the median household income, the revenue loss would total $3,293,740—roughly 40% of the value of the project.
In five other San Francisco Bay Area Cities, the authors found a total loss of over $1 billion. To counter this effect of price controls, developers either take their business elsewhere or sell the remaining homes at above-market prices—a cost passed directly to homebuyers.
Moreover, many builders argue that these mandates violate the takings clause of the Fifth Amendment because they forcibly direct private property toward public goals without just compensation.
But in 2001, the court in Home Builders Association of Northern California v. City of Napa rejected this argument. It ruled that below-market housing mandates offer compensating benefits and necessarily increase the supply of affordable housing. But in Below-Market Housing Mandates as Takings, the authors refute both of these conclusions. Showing that the “compensating benefits” do not nearly offset the developers’ losses and are in fact counterproductive in inviting growth, they discover that “below-market housing mandates...are no different in substance than an outright taking under eminent domain.”
On the surface, “inclusionary” zoning seems inclusive, promising to invite more buyers and developers into the housing equation. But examination of a thirty-year history reveals just the opposite. “With 10 percent fewer homes and 20 percent higher prices,” local officials should consider leaving housing to the free market.
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