By National Association of Home Builders
A recent report, authored by the UCLA Lewis Center for Regional Policy Studies and published by the Terner Center at UC Berkeley, examines how inclusionary zoning rules impact housing production and affordability. The report notes that although inclusionary zoning can help increase housing for low-income families, the mandates also suppress overall housing production if taken too far.
The report primarily focuses on the city of Los Angeles’ Transit Oriented Communities program. This program was implemented in 2017 with a goal of boosting housing production, including below-market-rate units, near bus and train stations.
Inclusionary zoning refers to local government ordinances that require a certain percentage of new residential construction to be sold or rented at below-market rates. According to the Terner Housing Policy Simulator, Los Angeles’ TOC program, with an IZ requirement of 11%, has likely boosted below-market-rate homes with minimal negative consequences for overall housing production.
However, increasing the required percentage of BMR units under IZ policy could sharply reduce overall housing production with declining benefits for overall housing affordability.
This study finds that changing the IZ level entails significant tradeoffs between BMR and market-rate production. As the BMR requirement rises, there are diminishing returns to BMR production and accelerating losses to overall housing production. In simulating increases in IZ requirements, each percentage point increase in requirements between 1% and 16% is associated with a reduction of between 4,600 and 11,900 market-rate units.
Beyond a certain level, higher IZ requirements produce less BMR and less market-rate housing. A 20% IZ requirement, while producing 50,000 BMR units, would reduce market-rate production by over 200,000 units.
Additionally, the study found that even small increases in rent growth in the unrestricted rental market would be enough to negate the value of private IZ subsidies. For example, compared to a no-IZ scenario, additional rent growth of just 0.8% per year in the 16% scenario would negate the value of private subsidies from IZ. The author concludes that two critical aspects of IZ programs are providing development incentives when market-rate developers include BMR units and making program participation voluntary.
This analysis highlights the important tradeoffs policymakers should consider when setting the requirements of IZ policies. (Source)