#3: Inside new land use regulations that actually make the housing crisis even worse.

A Quick Guide to San Jose's "Extreme" Inclusionary Zoning Regulations

November 8, 2019

It doesn't get a lot of press, but San Jose's City Council on November 5 will consider another affordable housing regulation that many housing experts and economists predict will make our housing crisis even worse. Scott Beyer of the Market Urbanism Report gives us his view in an exclusive interview.

Opportunity Now: What is inclusionary zoning?

Scott Beyer: Inclusionary zoning, sometimes called inclusionary housing, is a zoning designation that cities use to force developers to set aside a certain amount of the new housing they are building as "affordable." For example, this could be defined as rents that can be afforded by people making 80 percent of median income. These set-asides can range from 5% to as high as 25%. These units rent out at below market rates. Montgomery County, MD was a pioneer in Inclusionary Zoning, beginning in the early 1970s.

ON: It sounds like it's a response to exclusionary zoning?

SB: Zoning has long been used by local municipalities as a way of segregating American cities along race lines and more recently along class lines. Politicians, city planners, and free market advocates quite understandably want to see a city that's more mixed, more fluid, more integrated, and more affordable. I think everybody wants to see a city where police officers, school teachers, and blue collar workers can afford to live where they work.

ON: But if cities want to fix their own flawed zoning policies of the past, why don't they just get rid of exclusionary zoning? Why create yet another regulation to fix previous flawed regulations?

SB: Clearly, if you want mixed-class neighborhoods, the better way to do it is to loosen the exclusionary zoning because that's the main thing that's creating the problem in the first place. Inclusionary zoning is just a band-aid type solution, as it just focuses on specific development in specific places. It really doesn't create much affordable new housing nor much integration. Getting rid of the exclusionary zoning regulations is more holistic, can be implemented on much larger portions of the city, and can be applied whether or not new development is going on.

ON: Why can't developers make money on new affordable housing?
SB: It's complicated, but think about it like this: new housing is not going to be affordable in the same way that new cars are not affordable. People pay premiums for new and novelty--they expect improvement and novelty in new things. So in housing this will be new technologies, new features, new building materials, new aesthetics, new amenities..But this doesn't mean that you can't create affordable housing. If new housing if focused on the upper tier income segments, that means that older units should be free to become lower-income units, just as used cars are cheaper than new cars.
In Economics jargon, this is called filtering--and it refers the natural depreciation of housing over time: when housing hits a certain age it should filter down to lower income groups. And you see that happening in more mixed cities like Houston that have radically less restrictive zoning and land use regulations. It's a statistically recognized concept.

ON: What impact does inclusionary zoning have on the market at large?

SB: Two things happen: first, it just discourages development. Developers will find that the required below market set asides make it very hard for a project to pencil out--to have a good enough return to attract funding. Second, it just raises the cost of the market rate housing, as developers have to make up for the loss on the affordable units with the market rate units. So the market rate tenants end up paying the difference.

ON: What's your take on the proposed changes to San Jose's Inclusionary Housing regulations, that the City Council will be voting on November 5?

SB: It's extreme. It is one thing to put Inclusionary Zoning mandates on large developments that have a high number of market-rate units on which to pass the costs. It's another to impose it on 5-unit projects where the financing will be more difficult and the margins thinner. A better alternative - if San Jose must have Inclusionary Zoning - is to grant generous density bonuses to the developer, to help them cover for the losses from the affordable units. But as currently concocted, this proposal will likely discourage construction, as Inclusionary Zoning has done elsewhere.

Further reading: Beyer compiles Inclusionary Zoning studies in a Forbes article and another study published more recently.

Read a Slate article on the filtering phenomenon in housing.

Scott Beyer is the founder and editor of the Market Urbanism Report.

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