A new University of California, Irvine working paper concludes that California’s mandatory inclusionary zoning policies significantly reduce housing production, estimating that the state’s typical affordable housing requirement cuts annual residential construction by nearly one-third while imposing substantial costs on market-rate renters.
The paper, Inclusionary Zoning and Housing Supply: Evidence from California’s Palmer Fix, was authored by economist Noah Kouchekinia and released June 11.
It examines the effects of mandatory inclusionary zoning (IZ) ordinances, which require developers to reserve a portion of new housing units for below-market-rate affordable housing.
According to the study, more than one-third of California jurisdictions have adopted inclusionary zoning ordinances. While the policies are designed to increase affordable housing, the paper argues they also function as a tax on new residential construction.
“Inclusionary Zoning requires developers to set aside a share of new units at affordable rates to low/moderate income tenants,” the paper states. “Mandatory inclusionary zoning acts as a tax on construction and, all else equal, reduces the overall supply of housing. This potentially reduces affordability in the aggregate.”
The study sought to resolve longstanding debate over whether inclusionary zoning meaningfully reduces housing production. Previous research has produced mixed findings, with some studies finding little or no effect while others found measurable declines.
To isolate the policy’s impact, Kouchekinia assembled a new statewide database of inclusionary zoning ordinances using administrative housing element reports from hundreds of California cities and counties. Rather than examining local adoption dates, the study takes advantage of California’s 2017 “Palmer Fix,” legislation that restored local governments’ authority to enforce inclusionary zoning requirements after the California Supreme Court’s 2009 Palmer v. City of Los Angeles decision had rendered many local ordinances unenforceable.
Using that natural experiment, the paper estimates that each one-percentage-point increase in the effective “implicit tax” imposed by an inclusionary zoning ordinance reduces new housing production by 7.6%.
“This implies that the typical inclusionary zoning ordinance reduces annual new residential construction by 31.8%,” the study concludes.
The paper also found that policy stringency matters considerably. Jurisdictions with relatively mild affordability requirements experienced little measurable effect on construction, while those with more demanding requirements experienced much larger declines.
“Accounting for the stringency of policies turns out to be critical,” the paper states. “Estimated effects are four times larger in the top quartile of IZ adopting jurisdictions than in the bottom quartile. Effects are statistically insignificant in the latter. This potentially explains the varied results of the prior literature.”
Beyond reducing the overall number of homes built, the research suggests developers also respond by shifting projects within cities.
“I find the policies shift development within jurisdictions, with larger reductions in new development in more expensive neighborhoods relative to less expensive neighborhoods,” the paper states. It found no evidence, however, that construction simply moves into neighboring cities without inclusionary zoning requirements.
The paper also examines the broader economic effects of the policies through a quantitative housing model.
It concludes that existing inclusionary zoning policies produce modest average benefits for lower-income residents because some households receive below-market-rate units, but those gains are unevenly distributed.
“I find that inclusionary zoning ordinances as they currently stand are mildly beneficial to low income residents on the average, though the effect is uneven, with large gains to those lucky enough to get an IZ unit, and mild welfare losses for the rest,” the paper states. “A hypothetical more stringent IZ policy generates large enough rent effects to more than counteract the benefits of the policy to low income residents through subsidized units.”
The paper also compares inclusionary zoning with direct affordable housing subsidies.
Using estimated increases in market rents attributable to reduced housing supply, Kouchekinia calculates that renters in California jurisdictions with inclusionary zoning paid approximately $6.97 billion in additional rent during the study period. The analysis estimates that mandatory inclusionary zoning produced roughly 8,990 affordable units during that same period, yielding an estimated cost of about $775,000 in additional market-rate rents for every affordable unit created.
The paper concludes that this exceeds the estimated marginal cost of producing affordable housing through California’s Low-Income Housing Tax Credit program.
“This implies a per-affordable-unit cost of $775,000 in terms of excess rents paid by market rate renters,” the study states. “This is substantially more than the marginal cost of directly subsidizing a low income housing unit through the Low Income Housing Tax Credit, which is estimated to be $441,000 in California.”
The author argues the findings have direct implications for California housing policy.
“By showing that inclusionary zoning ordinances constrain housing supply, these findings should empower state regulators to review ordinances at cities which fail to meet housing goals,” the paper concludes.
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