New Issue Brief Suggests Limits of Inclusionary Zoning Policy

As American cities face political pressure to resolve housing prices, policymakers must look carefully at IZ policies to avoid backfiring on their goals of affordable housing

NEW YORK, NY – As housing prices have taken off in many American cities, many have turned to “inclusionary zoning” (IZ) to encourage or require housing-project developers to rent a portion of units at lower than market-rate rents. In a new issue brief, Manhattan Institute fellow Connor Harris reviews the economic theory and empirical studies relevant to this policy approach. His review finds theoretical and empirical evidence that IZ creates market distortions which reduce housing development and supply, counteracting IZ’s goals of providing affordable housing.  

On a theoretical level, Harris cites the work of law professor Robert Ellickson to clarify why reserving below market-rate housing is less optimal than constructing new housing at market-rate prices. Contrary to popular rhetoric against “luxury condos,” the construction of market-rate apartments benefits far more people than just their occupants and can provide far broader housing benefits to lower-income households than IZ does. He also notes that Ellickson’s work suggests IZ can reduce incentives for developers to build in the long run, further harming the goal of housing accessibility. 

Harris finds that the empirical evidence for IZ is similarly shaky, with its shortcomings clearly indicated by case studies in New York, Portland, and Minneapolis . He finds that IZ tends to make construction unprofitable in large swaths of cities, while providing only meager below-market-rate housing units. In Minneapolis, for example, he notes how planning estimations significantly overestimated new construction in the first six months after IZ came into effect.  

Harris suggests that leaders facing political pressure to adopt IZ rules should at least ensure such rules mitigate a couple serious obstacles to development. IZ policies should never reduce market-rate construction and should likely be applied only to certain neighborhoods with high housing demand. Additionally, giving developers other options to satisfy IZ requirements, such as contributing to an affordable housing fund or developing units below market rate at other locations, can mitigate some of the harms IZ can bring. While full liberalization of zoning rules across the board is ideal, proponents of IZ must, in any case, avoid the pitfalls of poorly designed IZ policies. 

Click here to read the full report.