cityscape Who Bears the Cost of Inclusionary Zoning?

Ontario is on track to pass legislation that would mandate the zoning by as soon as the end of the year.

The Province is expected to adopt the Promoting Affordable Housing Act late this year or early 2017, which would amend the Planning Act and grant Toronto the power to mandate inclusionary zoning—a requirement that a given share of newly developed housing units be affordable to people with low incomes.

This development has been celebrated by councillors and prominent civil servants, including Chief Planner Jennifer Keesmaat, who see in inclusionary zoning a partial solution to the city’s housing affordability crisis. Their logic seems intuitive: in a city faced with rapidly increasing prices for housing, one way to ensure a continued stock of reasonably priced units is to require them by law.

This sentiment is echoed by non-profit groups, such as Social Planning Toronto, who share the policy’s stated objective.

There hasn’t, however, been much discussion—and certainly no thorough analysis—of the incidence of inclusionary zoning—that is, its effect on the distribution of economic welfare.

The costs associated with such an ordinance would necessarily be borne either by landowners, developers, or homebuyers, as they are not, by design, borne by government. This matters because it affects development incentives at the margin and could lead to the unintended consequence of diminished production and higher market prices, making it counterproductive at best.

Indeed, most opposition to inclusionary zoning stems from the argument that it benefits those who are awarded affordable units at a cost to everybody else.

Proponents, however, counter by noting that developers already charge the maximum sale price for their units that the market will bear and are therefore unable to pass along additional costs to homebuyers through higher prices. They argue that these costs are instead largely borne by landowners—a defensible setup as landowners extract unearned economic rents provided by public investments. (A landowner does not earn the bump to his or her land value caused by new neighbourhood infrastructure.) Inclusionary zoning, in their view, can be thought of as a socially desirable land value recapture scheme.

No, it doesn't. Land values adjust to accommodate the requirement; for this reason must be implemented city wide. https://t.co/sp3w3jvQxG — jennifer keesmaat (@jen_keesmaat) January 11, 2016

Keesmaat alludes to this argument when she tweets that, “Land values adjust to accommodate [incluzionary zoning].”

Unfortunately, it’s not that simple.

Homebuyers can be made to bear the cost of inclusionary zoning if landowners, to avoid the same, divert their land to commercial, industrial, or other uses, reducing competition and downward pressure on prices. Local market conditions will determine exactly how the burden is split. Whichever party has the fewest options will find themselves stuck with the short end of the stick.

Those advocates of inclusionary zoning that see it as a means to redistribute developer profits to low income families should note that developers have the most options of all. If inclusionary zoning leads to a decrease in the number of profitable projects in the city, they can exit and pursue projects elsewhere. (Most homebuyers, tethered to their jobs, do not have that same luxury, to say nothing of landowners.)

Ultimately, it’s an open question. While there has been some academic research performed on this topic (Mallach, 1984; Brunick, 2004; Gladki and Pomeroy, 2007), none accounts for Toronto’s unique local conditions.

As the Promoting Affordable Housing Act makes its way through the legislative process, we should demand that this question be investigated and answered, or at least taken seriously. Only then will we be able to claim with any degree of confidence whether or not we’re moving in the right direction with regard to housing affordability.