The City Council of Los Angeles recently signed off on an ordinance to force developers to provide more mixed-income housing. If you are wondering what the term "mixed-income housing" really means, previous ordinance titles were "affordable housing mandates" (AHM), "inclusionary zoning" (IZ) or "below market-rate housing" (BMR). We prefer the term "price-controlled housing."
Regardless of what you call such ordinances, the unintended consequence is to decrease the overall supply of housing and make housing less affordable.
Suppose there were evidence that these policies actually increased the cost of housing by 20 percent and decreased the number of available new homes by 10 percent? Wouldn't that encourage us to take a serious look at what our housing policies are doing these days?
Here's the history:
In 2001, when homebuilders challenged a local "inclusionary zoning" law requiring them to sell 10 percent of any homes, townhomes, condos or apartments they build at an average of $300,000 less than the fair market price, the Court of Appeal sided with the government.
Writing for the majority in Home Builders Association of Northern California versus City of Napa, former Circuit Court Judge Scott Snowden said, " it is beyond question that (the City of Napa's) inclusionary zoning ordinance will 'substantially advance' the important governmental interest of providing affordable housing for low- and moderate-income families." The ordinance, he concluded, "will necessarily increase the supply of affordable housing."
The court based its opinion partly on economic arguments. Now, in hindsight, we are able to test those arguments and see how they hold up against the evidence.
We recently analyzed how inclusionary zoning laws requiring builders to set aside a given percentage of new construction for low- to moderate-income individuals have affected both new home prices and the quantity of new homes over time.
During the period we studied, the number of California cities with inclusionary zoning laws increased from 15 to 56. We compared the changes in housing prices and supply in these cities with those without a similar ordinance. The cities that adopted inclusionary zoning laws saw a 20 percent jump in housing prices and a 10 percent decrease in the number of new units built. This is the basic law of supply and demand at work. Price-controlled housing mandates have had an unintended consequence: They have discouraged homebuilding, and the diminished supply of housing has driven prices up.
When forced to sell at below-market rates due to this type of zoning, homebuilders must choose between decreasing the number of affordable units versus taking a loss. And, not surprisingly, they almost always choose decreasing the number of affordable units, which they accomplish by reducing the total number of planned units.
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