“Inclusionary Zoning” Rests on Faulty Economics


June 11, 2015 12:22PM

A recent article in the Tennessean discussed an affordable housing bill that includes “inclusionary zoning,” which would require landlords in Nashville to set aside 14% of their new units with prices the government deems “affordable.” Although variants of such policies exist in almost 500 local governments in 27 states, the proposal is an incredibly inefficient way to address the needs of low-income families and will only invite corruption.

No one denies that there are many struggling families who find it difficult to afford rent or mortgage payments. Yet, even if we thought using government power were a valid means of addressing the problem—rather than purely voluntary means of assistance—it makes little sense to pass a rule forcing landlords to set aside an arbitrary percentage of their stock as affordable. This rule would force landlords to bear the brunt of the cost of a social goal, and would have many unintended consequences that economists spell out in introductory textbooks.

To see how inefficient the inclusionary zoning approach is, imagine it were applied in other areas. For example, most Americans agree that the government should step in to help low-income families obtain food and to provide their children with a basic education. Imagine if the government tried to achieve these goals by forcing farmers to make 14% of their crops “affordable,” or to require all private schools to give up 14% of their slots to low-income students who were charged a much lower price than other students.

It should be clear that these hypothetical measures would be a very inefficient way to make food and education affordable. Most obvious, by placing the restrictions on the producers of food and education, these hypothetical measures would make it less attractive to go into farming or to start a private school.

A similar pattern holds for housing. Artificially capping the revenue a landlord can earn on 14% of his rental units will make it less attractive to build new apartment buildings in the first place. So yes, those low-income families who find housing will appreciate the price break, but there will be less housing to go around.

More generally, all of the problems with rent control apply to inclusionary zoning as well. For example, if certain units in an apartment complex are designated for the program, then there will be a long list of families eager to get into these units—because they are deliberately priced below the true market rate. Other things equal, landlords won’t be nearly as eager to keep these customers happy, compared to those paying full rent. When the water heater blows at 5:00 am, or the hallway needs a new coat of paint, the owner will not be as responsive because his or her incentives have been artificially changed. Thus, even the low-income families who obtain the special, cheaper housing better come with lower expectations as well.

Finally, this proposal is just asking for corruption. The Tennessean article stated: “Also at issue will be whether the city assists developers with incentives or allows projects to avoid requirements in exchange for making cash payments—money that, as proposed, would go into the affordable housing fund.” It is a dangerous affair if the city effectively says to certain business owners: We’re going to limit how much money you can charge your customers, unless you pay up.

Although there is a genuine problem with low-income families affording housing, the idea of “inclusionary zoning” rests on faulty economics. It would actually reduce the amount of housing available—for both rich and poor—and would reduce the quality of housing even for those tenants still able to find places. If the people of Nashville want to make housing more affordable for the poor, there are more sensible approaches.

Robert P. Murphy is an economist who lives in Nashville. He is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015).

*This is a guest blog post and does not necessarily reflect the views of the Beacon Center.