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Excluding inclusion

Most politicians give at least lip service to affordable housing. With housing prices throughout the region skyrocketing, and new construction far below the level needed to accommodate a growing population, Bay Area leaders often make proposals to encourage housing affordability. But the most popular of those policies, so-called Inclusionary Zoning, dominates the debate to the exclusion of market-oriented ideas. This week, V Smoothe and I will be suggesting new ways for Oakland to increase housing affordability, both market-rate and subsidized. Several flaws with Inclusionary Zoning show that, far from being the answer, the policy in fact will make the housing situation far worse.

First and foremost, Inclusionary Zoning policies strongly discourage housing construction. By being forced to give part of their units away below-cost, developers are subject to an implied tax that reduces their capital investment. Other uses of expensive land become relatively more profitable when housing is singled out for price controls, and developers lose their incentive to construct as much housing as possible (eg, if the IZ fee threshold is set at 20 units, we’ll see a lot of 19-unit buildings). There is a strong statistical relationship between IZ price controls and plummeting housing construction – check out Berkeley. Since they adopted strict IZ in 2000, there have been only eight condo units built. Because most of our affordable-housing dollars depend on taxes paid by new construction, a slowdown would jeopardize those funds.

Second, IZ targets exactly the wrong people to pay for “affordable” housing. The median price of a single-family home in Oakland is over $600,000, but most newly-built condos in Oakland cost between $400k and $500k. Ultimately, the owners of new condos have to pay for IZ, because developers will pass the costs on. Transit-oriented development for middle-class people will suffer, while people living in new mansions in the Hills or existing single-family homes aren’t asked to contribute a dime. Because IZ requires more units to be built for developers to capture the same profit, it is likely that IZ will lead to even more conflicts with neighbors over density, further delaying projects and increasing housing costs. Neighbors may also resent having to compete with subsidized units when reselling their own homes. Also, because the “affordable” units can be available to people making over $90k/year (more than what almost everyone in my market-rate condo complex makes), it is likely that market-rate homeowners making less money will subsidize the “affordable” homeowners, which is deeply regressive. If that’s not true, and there is a large gap between incomes within a condo complex subject to IZ, condo fees will be burdensome to the poorer residents.

Third, the end result of Inclusionary Zoning is of dubious value. The “affordable” units, usually called Below Market Rate (BMR), are price-restricted for 45 years or more, usually enforced by requiring the condo buyers to sell their units back to a non-profit developer at a fixed price. While the non-profit gets to hold units using their customers’ capital, the condo owners are limited in the appreciation they can capture. It is not homeownership, because the non-profit developer is the real owner. SF’s experience suggests that minority groups are less likely than whites to take advantage of the programs because they are more fearful of being exploited by the non-profit owners of the units. Using other sources of city housing funds to subsidize BMR units (like downpayment assistance) will further concentrate city housing funds in the hands of non-profit developers, while real homeownership opportunities are lost. Also, as with all price controls, there are strong incentives to game the system. In San Diego and Irvine, illegal resale or rerental of BMR units has been rampant.

This is only a quick primer on IZ. This series of blogs seeks to suggest other opportunities. The non-profit developers desperate for IZ, which to them represents a riskless and permanent source of housing units to control, are uninterested in any housing solutions that do not benefit them (like Section 8). The City Council members that are most interested in affordable housing are seemingly in thrall to the non-profits, while the largest for-profit developers already include subsidized units in their projects and so have no real incentive to fight IZ. Small-time developers, though, have little political clout, and of course there is nobody to speak for future residents. To maximize transit-oriented development, neighborhood revitalization, and city tax revenue, and to meet both market-rate and low-income housing demand, new ideas and solutions that encourage housing are vitally necessary.


Non-profit developers’ study of IZ in California.

Economists’ study of IZ in the Bay Area.

Blue Ribbon Commission page, including loads of reference material.

Posted in california, citycouncil, housing, iz, oakland.

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Continuing the Discussion

  1. Floating a fair housing bond « FutureOakland linked to this post on October 31, 2007

    [...] Also, it’s likely that new housing constructed by non-profit developers would be BMR condos, which provide very little value to the community and are only technically “affordable.” Because the bond is paid by existing residents, the funds should go to helping existing residents, [...]