The Structure and Potential Economic Effects of Inclusionary Zoning Ordinances

By Read, Dustin C. | Real Estate Issues, Summer 2009 | Go to article overview

The Structure and Potential Economic Effects of Inclusionary Zoning Ordinances


Read, Dustin C., Real Estate Issues


INTRODUCTION

Inclusionary zoning ordinances encourage or require real estate developers to set aside a percentage of the units included in market-rate residential development projects for low- and moderate-income households. By leveraging the resources of the private sector, this type of land use regulation potentially offers an effective way to expand the housing options available throughout a jurisdiction without the need for costly public subsidies. Surveys indicate inclusionary zoning has produced more than 34,000 affordable units in the state of California alone over the past three decades. (1) Success stories have also been reported in several other states where inclusionary zoning has become much more common in recent years. (2) Nonetheless, concerns have been raised that inclusionary zoning can constrain residential development and increase housing prices in some instances. Understanding its strengths and weaknesses is therefore essential to help policymakers craft regulations that expand housing opportunities, while being mindful of unintended economic consequences. (3) The literature review presented in this article is designed to provide such an understanding.

The analysis begins by describing the structure of inclusionary zoning ordinances and the characteristics that differentiate them from related affordable housing initiatives. Existing research is then reviewed to present a framework suitable to evaluate whether this policy tool encourages the production of affordable housing by offering developers appropriate incentives or by shifting the cost to other market participants. Results of recently completed empirical studies are additionally summarized to examine the impact of these regulations in select areas.

The analysis concludes by discussing inclusionary zoning's potential effectiveness in distressed housing markets to illustrate the challenges faced by many municipalities in the current economic environment.

REGULATORY BARRIERS TO AFFORDABLE HOUSING DEVELOPMENT

Inclusionary zoning is sometimes described as the antithesis of "exclusionary" land use regulations, such as minimum lot size requirements and restrictions on multi-family development that have contributed to the shortage of affordable housing in the United States. (4) The description is elegant, but somewhat inaccurate. Inclusionary zoning ordinances do not directly reduce the number of regulations imposed on residential development. Many actually put additional administrative procedures in place to ensure real estate developers produce housing for a specific segment of the market. For this reason, inclusionary zoning must be differentiated from more direct efforts to remove regulatory barriers limiting the availability of affordable housing.

Municipalities with cumbersome zoning ordinances have the ability to increase their stock of affordable housing by relaxing the regulations governing residential development. Some have done this by expanding the amount of land zoned for multi-family housing and by authorizing higher-density development. (5) These approaches do not guarantee the development of housing accessible to low-and moderate-income families, but can relieve upward pressure on prices by removing supply constraints.

Other municipalities have chosen to leave restrictive land use regulations in place to address a variety of fiscal and social issues. Low- and moderate-income housing may fail to "pay for itself" if it generates a limited amount of tax revenue and attracts residents with relatively high public service demands. (6) All types of residential development also can generate negative externalities such as traffic congestion, loss of green space and overcrowded public schools, when growth is not managed. These factors create economic and political incentives for local officials to restrict the amount of land available for residential development.

While regulations limiting housing supply can increase prices, they are not necessarily inefficient from an economic perspective if they slow development to a socially optimal level reflecting fiscal and social externalities. …

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