Inclusionary Housing: The Good and the Bad

Inclusionary Housing: The Good and the Bad

By Kate Reid

Inclusionary housing (also known as below-market housing or inclusionary zoning) refers to an affordable housing strategy that requires developers of new market-rate real estate to sell a percentage of units in their new development at below-market rates. For cities struggling with economic integration, or displacement of low-income residents due to rising housing costs, inclusionary housing offers a very tangible solution. The strategy though, which has existed for years, contains a myriad of pros and cons which must be readily understood before successful programs are instituted by communities.

Inclusionary Housing

In California specifically, affordable housing is a huge concern. Between 1970 and 1980, California home prices went from 30% above U.S. levels to more than 80% higher, and today an average California home costs $440,000, about two and a half times the average national home price of $180,000 (LA Times).

Just last June, the California Supreme Court cited an affordable housing crisis of “epic proportions” and passed in a unanimous decision a ruling which will make it easier for cities and counties to require developers to sell a certain amount of housing at below-market rates (LA Times). The ruling came after a challenge to an affordable housing ordinance passed by San Jose five years ago where the state building industry (backed by real estate groups) sued the city, contending it was unconstitutional “taking” of private property, and effectively blocking San Jose from enforcing the law.

How Inclusionary Housing Works

Inclusionary housing happens as the result of local lawmaker polices which tie commercial development and market-rate residential construction to the construction of low or moderate-income housing. Zoning codes are a common example of ways these affordable housing units are legally enforced, though this is far from the only method.

Since most programs create a cost discrepancy for developers, it’s typical that programs will partially offset this cost through incentives for developers of these units such as tax abatements, the right to build at higher densities, or parking reductions. In response to the varying needs of communities, some policies offer a volunteer approach (requiring affordable units only if developers utilize incentives) or an in-lieu fee that developers must pay if they opt not to build affordable units. Some programs have also applied inclusionary policies to commercial real estate where “impact fees” (typically a fee per square foot from all new commercial development) are used to fund new affordable housing production.

It is important to note that for inclusionary housing programs to be effective, affordability over a long period of time is essential. Early inclusionary programs saw these unit’s prices revert to market-rate in a short period of time, but now it is common policy to require affordability periods for 30 years or longer (Lincoln Institute of Land Policy).

Cons of Inclusionary Housing

While inclusionary housing offers a potential solution for the huge lack of affordable housing that many communities face, there are some concerns that come to mind when contemplating this strategy. One of the immediate and most obvious questions relates to fairness, namely, is it fair to ask developers (just one group) to solve a broad societal issue? The answer is no, it is not fair to ask developers to solve all the affordable housing issues within a community.

It is fair to ask that they compensate in some way for the economic impact of their developments. Most housing, despite the basic assumption that more housing leads to lower prices, actually results in increased housing costs. This is largely due to the fact that new units are primarily built for higher-income earners which when coupled with the spending patterns of these residents (generally facilitating the demand for more lower-wage workers in the area) results in a greater demand for housing at a higher cost.

Additional concerns for inclusionary housing include: the cost developers incur will be passed on to tenants and homebuyers, inclusionary policies will prevent new developments and ultimately make the housing problem worse, resale price controls eliminate homeowners’ ability to realize a reasonable profit on the resale of their home (taking away the incentive to maintain their home + making resale difficult), and that local governments do not have the resources (staff/experience) to implement effective inclusionary programs. 

Pros of Inclusionary Housing

As much as there are obvious concerns to inclusionary housing, there are obvious benefits. Concerns about higher costs due to inclusionary housing can generally be combatted by the fact that most inclusionary programs offer incentives to developers that actually reduce developers project costs (ex: reduced or deferred developer fees, ability to build in higher density, land purchase assistance, bond financing, reduced traffic/parking provisions… etc.). Another major pro of inclusionary housing is that these low-income affordable units are indistinguishable from the market-rate units in the developments they are located in, therefor not only helping to foster diversity and mixed socio-economic neighborhoods but also reducing the stigma generally attached to ‘low-income housing’.

While it’s true that inclusionary housing programs create only a modest amount of affordable housing, not likely to immediately solve a community’s need for affordable housing, the long-term affordability that these programs offer provides a solid tool for steadily increasing the amount of affordable housing (without dramatically impacting state or federal resources) into a significant share of the local housing pool.

Perhaps the biggest pro of inclusionary housing though, is that it is one of the only proven strategies to equitably provide residents of all income levels access to asset rich neighborhoods with quality schools, public services, commercial centers, and jobs, which generally equate to a higher quality of life.

Alternatives to Inclusionary Housing

While inclusionary housing is one solution to the affordable housing crisis, there are other alternatives, which may come with less controversy. Here are some affordable housing strategies that act as alternatives to inclusionary housing:

  1. Accessory Dwelling Units: ADU’s or “mother-in-law units” are secondary homes on properties that would normally only have one housing unit (think free standing guest houses, converted garages, basement units etc.). They offer a quick and easy way to house more people/increase the amount of housing in a community.
  1. Community Land Trusts: A community land trust is a non-profit that aims to develop permanent affordable housing by taking the cost of the land out of the speculative market and creating opportunities for low-income families to find affordable, long-lasting housing solutions.
  1. Micro or Modular Houses: Besides being all the rage right now, tiny or modular houses are a powerful affordable housing strategy because small homes are significantly less costly to build and purchase, require much less energy, and are easily movable.
  1. Cooperatives: Housing cooperatives are properties that are owned and managed by their residents, who pool their buying power to save on property costs and living expenses.
  1. Work/Trade Housing: In certain situations when there is high demand for skills or labor (think landscaping maintenance, elder-care, house-sitting, handyperson services etc.) a work-trade or barter situation can be a good solution for affordable housing.
  1. Senior Community Housing: Community housing for seniors can provide much of the desired aspects for quality life for the elderly including community engagement, affordability, and accessibility, which seniors do not receive in isolated apartments or houses. The development of these communities can free up houses that are capable of lodging large families (or multiple families using the ADU approach).

To read more about Affordable Housing in Santa Cruz County: Funding Affordable Housing in Santa Cruz, Civinomics.

Written by Kate Reid

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