Housing Market Impacts of Inclusionary Zoning

Gerrit-Jan Knaap, Antonio Bento, and Scott Lowe (2008)

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Many communities across the country face affordable housing challenges. An increasing number of communities are considering inclusionary zoning as a response. Inclusionary zoning programs, which require developers to sell a certain percentage of newly developed housing units at below market rates to lower income households, are politically attractive because they are viewed as a way to promote housing affordability without raising taxes or using public funds. Standard economic theory, however, suggests that such programs act like a tax on housing construction. And just like other taxes, the burdens of inclusionary zoning are passed on to housing consumers, housing producers, and landowners. As a result, inclusionary zoning policies could exacerbate the affordable housing problem that they are designed to address.

Although debate over the merits of inclusionary zoning has continued for nearly three decades, there have been no rigorous studies on their effects on housing prices and starts. We offer such an analysis here, estimating the effects of inclusionary zoning policies on single family housing prices, single family and multifamily housing starts, and the size of single family housing units in California over the period from 1988 to 2005. In our analyses, we are able to isolate the impacts of inclusionary zoning programs by carefully controlling for spatial and temporal conditions, such as the neighborhood or school district within which the house is located, and changing market conditions over time.

We find that inclusionary zoning policies had measurable effects on housing markets in jurisdictions that adopt them: the share of multifamily housing increases; the price of single family houses increases; and the size of single family houses decreases. These results are fully consistent with economic theory and demonstrate that inclusionary zoning policies do not come without cost.

Overall, we find that inclusionary zoning programs had significant effects on housing markets in California from 1988 to 2005. Although cities with existing or new programs during the study period did not experience a significant reduction in the rate of single family housing starts, they did experience a marginally significant increase in multifamily housing starts. More specifically, we found that in municipalities with inclusionary housing programs, the share of multifamily housing starts increased seven percent. The reasons for this shift are relatively clear when viewed in the proper context. Housing markets in California expanded rapidly over the 1990s as pent up demand exploded following the 1991 recession. The imposition of inclusionary zoning requirements was not strong enough to slow the overall rate of housing production but did cause a measurable shift from single family to multifamily housing production. We further found that the magnitude of this shift varied with the stringency of the inclusionary requirements.

We also found that housing prices in cities that adopted inclusionary zoning increased about 2-3 percent faster than cities that did not adopt such policies. In addition, we found that housing price effects were greater in higher priced housing markets than in lower priced markets. That is, housing that sold for less than $187,000 (in 1988 dollars1) decreased by only 0.8 percent while housing that sold for more than $187,000 increased by 5.0 percent. These findings suggest that housing producers did not in general respond to inclusionary requirements by slowing the rate of single family housing construction but did pass the increase in production costs on to housing consumers. Further, housing producers were better able to pass on the increase in costs in higher priced housing markets than in lower priced housing markets.

Finally, we found that the size of market rate houses in cities that adopted inclusionary zoning increased more slowly than in cities without such programs. Specifically, we found that housing in cities with inclusionary zoning programs was approximately 48 square feet smaller than in cities without inclusionary programs. Further, most of the reductions in housing size occurred in houses that sold for less than $187,000. These findings suggest that inclusionary zoning programs caused housing producers to increase the price of more expensive homes in markets where residents were less sensitive to price, and to decrease the size of less expensive homes in markets where residents were more sensitive to price.