HomeMy WebLinkAbout2019-10-18_07_30_AM-Advisory_GroupsAgenda
Housing Strategy Task Force
City of Edina, Minnesota
Community Room - City Hall
Friday, October 18, 2019
7:30 AM
I.Call To Order
II.Attendance
III.Approval Of Meeting Agenda
IV.Approval Of Meeting Minutes
a.Minutes: October 9, 2019
V.Discussion Items
a.Guest presenter: Mary Bujold, Max(eld Research
VI.Adjournment
The City of Edina wants all residents to be comfortable being part of the public process. If
you need assistance in the way of hearing ampli(cation, an interpreter, large-print
documents or something else, please call 952-927-8861 72 hours in advance of the meeting.
Date: October 18, 2019 Agenda Item #: IV.a.
To:Members Item Type:
Minutes
From:Danielle Boschee, Communications Specialist
Item Activity:
Subject:Minutes: October 9, 2019 Action
CITY OF EDINA
4801 West 50th Street
Edina, MN 55424
www.edinamn.gov
ACTION REQUESTED:
INTRODUCTION:
ATTACHMENTS:
Description
Minutes: October 9, 2019
Draft Minutes☒
Approved Minutes☐
Approved Date
I. Call To Order
Chair Hunt called the meeting to order at 7:35 AM
II. Roll Call
Present: Co-Chairs Hornig and Hunt; Members Burke, Kitui, Mehta, Koon, and Siekman; Staff
Liaison Hawkinson and Staff Boschee
III. Approval Of Meeting Agenda
Agenda was accepted as presented.
IV. Approval Of Meeting Minutes
Hunt moved and seconded by Mehta to approve the September 20 meeting minutes. Motion
carried.
V. Discussion Items
Edina Public Schools Director of Equity and Wellbeing Mary Manderfeld discussed
Edina’s school district population and answered questions presented by the HSTF
panel
Need for more preparation before HSTF meetings
Future small-group discussions and adding another meeting at the end of October
VI. Adjournment
The meeting ended at 8:50 AM
Minutes
Housing Strategy Task Force
City Of Edina, Minnesota
Community Room
October 9, 2019 7:30 AM
Date: October 18, 2019 Agenda Item #: V.a.
To:Members Item Type:
Advisory Communication
From:Stephanie Hawkinson, Affordable housing
Development Manager Item Activity:
Subject:Guest presenter: Mary Bujold, Maxfield Research Discussion
CITY OF EDINA
4801 West 50th Street
Edina, MN 55424
www.edinamn.gov
ACTION REQUESTED:
None.
INTRODUCTION:
Mary Bujold from Maxfield Research will discuss the Market Study that is underway and will field questions
from the Task Force Members.
ATTACHMENTS:
Description
Inclusionary Housing In California
Papers in Evolutionary Economic Geography
NON-PROFIT HOUSING ASSOCIATION OF NORTHERN CALIFORNIA
CALIFORNIA COALITION FOR RURAL HOUSING
Inclusionary
Housing
in California:
30 YEARS OF
I NNOVATION
cover.qx 6/30/03 10:00 AM Page 2
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
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Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Section I. What is Inclusionary Housing? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A.Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B.Inclusionary Programs in California and Nationwide . . . . . . . . . . . . . . . . . . 2
C.The Great Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
D.Past Inclusionary Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
E. Key Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section II. Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section III. Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A.Number of Inclusionary Jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
B.Measuring Effects on Affordable Housing Production . . . . . . . . . . . . . . . . . 7
C.Forms of Inclusionary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
D.Voluntary or Mandatory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
E. Inclusionary Requirement and Project Size . . . . . . . . . . . . . . . . . . . . . . . . . 9
F. Income-Targeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
G.Alternatives to Construction On-Site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
H.Developer Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
I. Length of Affordability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
J. Obstacles to Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section IV. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
A.In Summary - Program Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
B.Critical Questions in Inclusionary Implementation . . . . . . . . . . . . . . . . . . 21
C.Policy Recommendations for Local Governments . . . . . . . . . . . . . . . . . . . 25
D.Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
A.Summary of Inclusionary Housing Survey . . . . . . . . . . . . . . . . . . . . . . . . . 31
B.Survey Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
C.Additional Readings and Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Acknowledgements
Photo credit (front cover): Burbank Housing Development Corporation, East Bay Housing Organization,
Greeninfo Network.
Copyright 2003, California Coalition for Rural Housing and Non-Profit Housing Association of
Northern California.
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iInclusionary Housing in California: 30 Years of Innovation
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City with inclusionary
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County with inclusionary
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Map provided by Greeninfo Network
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ii
E XECUTIVE S UMMARY
Inclusionary Housing in California: 30 Years of Innovation examines the
increasing prevalence and impact of inclusionary housing programs as one of the
most promising ways to address the affordable housing crisis in California. The
California Coalition for Rural Housing (CCRH) and the Non-Profit Housing
Association of Northern California (NPH) summarize their survey findings and high-
light key program features that are successfully creating affordable housing in 20
percent of the localities in California (107 cities and counties). This represents a
two-thirds increase in inclusionary programs in California over the last decade, indi-
cating the growing popularity and importance of this affordable housing strategy.
The report is intended to inform policy makers and the public about the central
policy decisions in creating an effective inclusionary housing program. This under-
standing is crucial because inclusionary housing has the potential to create at least
15,000 units of affordable housing annually, nearly doubling the current rate of afford-
able housing production in California, according to the authors’ calculations. While
inclusionary housing is not a substitute for a comprehensive affordable housing strat-
egy, it can and does play a significant role in creating and maintaining vibrant neigh-
borhoods, reducing traffic gridlock, and strengthening families and communities.
H OW DID WE GET HERE?
The sad reality today is that a very large proportion of California families can’t
afford to pay market prices for housing. While overcrowding and substandard quali-
ty are also major aspects of the housing crisis in our state, the biggest problem fac-
ing California households is affordability. While the crisis of affordability hits lower
income renters the hardest, it has now spread to middle class earners, seriously
impacting dreams for homeownership. The search for affordable homeownership
has also exacerbated the "jobs-housing imbalance"—the geographic mismatch
between available jobs and affordably priced housing.
What has led to this housing problem? Most experts can agree on three
primary factors:
1. Failure to produce enough affordable housing to keep pace with population
growth;
2. Slow growth in incomes for low and moderate-income people; and
3. Job growth exceeds housing growth in all of the state’s major
metropolitan areas.
I NCLUSIONARY H OUSING A S A N I NTEGRAL P ART OF
T HE S OLUTION
Inclusionary housing (or inclusionary zoning), while not uncontroversial,
is increasingly being used as a major tool for addressing the affordable housing
shortage. For the purpose of this study, "inclusionary" is defined as a mandatory
requirement or voluntary goal to reserve a certain percentage of housing units for
lower-income households in new residential developments. The affordable units are
often expected to be dispersed throughout the development in an effort to include a
mix of income levels within new residential areas.
Inclusionary housing has created over 34,000 affordable homes and apartments
in California over the past 30 years. As of March 2003, one-fifth of all localities in the
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Ex Sum.qx 6/30/03 3:50 PM Page ii
iiiInclusionary Housing in California: 30 Years of Innovation
state (107 California cities and counties) reported using inclusionary housing, nearly
a 50 percent increase since 1994, when researchers first identified 64 inclusionary
policies or ordinances. The spread of inclusionary programs is most dramatic among
cities, which represent 41 of the 43 new programs. At least a dozen other California
jurisdictions are presently considering adopting inclusionary housing, including the
largest city, Los Angeles.
California’s housing crisis has serious implications for the future of
our state.
The performance of our schools; urban sprawl; transportation gridlock; the
continued strength of the California economy; health care for families and chil-
dren—these are pressing social issues at the top of the agenda of decision makers
and concerned citizens. Largely hidden from view is how powerfully affordable
housing impacts these very issues.
Given the pressing need for solutions and the increasing importance of inclusion-
ary housing, NPH and CCRH conducted a survey to determine how local inclusionary
housing programs are structured, as well as their relative effectiveness.
In designing effective inclusionary housing programs, the most significant poli-
cy considerations are:
1. The inclusionary percentage—how much is required;
2. Income levels targeted;
3. Alternatives to construction on-site;
4. Developer incentives; and
5. Length of affordability.
These are briefly summarized below and in more detail in the body
of the report.
K EY F INDINGS: FEATURES OF L OCAL I NCLUSIONARY
H OUSING P ROGRAMS IN C ALIFORNIA
Inclusionary Percentage
There is considerable variation in terms of percentage of units required under
these programs. The mean percentage of affordable housing required in both rental
and for-sale housing developments is 13 percent, indicating little variation in
requirements by form of tenure. Half of all programs require at least 15 percent, of
which nearly one-quarter of programs require 20 percent or more. The most fre-
quent inclusionary percentage is 10 percent (44 percent of jurisdictions).
Income-Targeting
Most programs require that inclusionary homes be targeted to one or more
pre-determined income groups, rather than providing developers with discretion or
choices about whom to serve. Rental units are targeted most frequently to
low-income households (earning 51 to 80 percent of median income), while for-sale
units are most frequently targeted to moderate-income households (81 to 120
percent of median income).
Ex Sum.qx 6/30/03 3:50 PM Page iii
iv California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Alternatives to Construction On-site
Programs typically offer developers one or more alternatives to constructing
affordable units within the market-rate project. Most common is paying fees in-lieu
of construction, offered by 81 percent of reporting programs. However, the in-lieu
fee option is automatic in only 45 percent of programs; for instance, payment of fees
may be an option only if the developer can prove that construction of affordable
units is infeasible. In two-thirds of programs, developers are permitted to construct
affordable units off-site. Less commonly, land dedications are allowable.
The mean in-lieu fee level among 57 programs reporting was surprisingly low
at $107,598 per affordable unit. Given that this fee level is lower than the actual sub-
sidy amount needed to create an affordable unit in many jurisdictions in California,
it seems likely in these cases that in-lieu fees are effectively undercutting the stated
goals of governing policy or ordinance. This is not necessarily an argument for elim-
inating in-lieu fees, however, since they can provide jurisdictions with funds to build
affordable housing serving people of even lower incomes, or to create supportive
housing for people with special needs.
Developer Incentives
Density bonuses are by far the most popular incentive offered to developers to
build affordable housing, reported by 91 percent of the programs. This is hardly sur-
prising given that State Density Bonus law requires such a bonus. Nonetheless, many
jurisdictions have adopted additional density bonus provisions to provide develop-
ers further incentives. Among other options, fast-track permit processing is an incen-
tive in 44 percent of programs, followed by subsidies in 43 percent, and design flexi-
bility in 40 percent. In addition, fee waivers (38 percent), fee reductions (32 percent)
and fee deferrals (25 percent), were also reported.
Length of Affordability and Monitoring
Virtually all jurisdictions now report that they have formal mechanisms to main-
tain affordability over time. Restrictions range from periods of ten years to in perpetu-
ity, with the mean term for rental housing being 42 years, and for homeownership
housing being 34 years. Permanent affordability is reported in at least 20 percent of
programs for both rental and for-sale. Monitoring remains an area of great concern.
Many jurisdictions declined to answer survey questions related to monitoring and
overall tracking of inclusionary production. Among those that responded, the
responses were often incomplete, leading the researchers to believe that greater
emphasis on monitoring and tracking is needed.
C ONCLUSION
The failure to address the housing crisis in both California and across the
country indicates the desperate need for a much broader debate around housing
policy at all levels of government. This report is designed to inspire a timely discus-
sion about one of the most promising approaches to addressing not just the afford-
able housing crisis, but related issues about growth and community stability. While
inclusionary housing does not provide all the answers, it has proven to be a critical
tool for enabling local governments to help begin solving the affordable housing
shortage in their communities.
Ex Sum.qx 6/30/03 3:50 PM Page iv
1Inclusionary Housing in California: 30 Years of Innovation
A. INTRODUCTION
Since the mid-1970s, many Californians have experienced enormous hardships
from living in some of the most expensive housing markets in the nation.
One quarter (25 percent) of renters in California’s metropolitan areas pay more than
half of their incomes toward rent (2001).1 Only 34 percent of California households
in 2001 could afford to buy the median-priced home in their area, compared to
57 percent nationally.2
The mismatch between supply and demand has been most painful for lower-
income people. Statewide, low-income renters with annual household incomes
under $18,000 (50 percent of the state median income) outnumber low-cost rental
units (those renting for $450 or less per month at 30 percent of household income)
in California’s metropolitan areas by a ratio of 2.3-to-1 (2001).3
As the affordability crisis has worsened, it has created new environmental, social
and economic problems. The search for affordable housing has literally driven millions
of Californians to seek housing hours from their existing communities and jobs. The
resulting 2 to 3 hour commutes have a devastating impact on air and water quality.
They also dramatically limit people’s ability to participate actively in the lives of their
children and communities. School districts, hospitals, and private sector employers
struggle to find and retain employees.
In response to these conditions, more and more communities have turned to
inclusionary housing practices to create affordable housing for their residents and
workers. Generally, inclusionary housing practices require developers to ensure
that a certain percentage of a new residential housing project will be priced
affordably. While not a substitute for a broader affordable housing strategy,
inclusionary housing practices are generally thought to address economic and
racial segregation by creating more economically diverse communities, particularly
in suburban jurisdictions. By providing housing options for lower-wage workers in
high-cost communities, inclusionary housing can also help reduce commutes and
address local mismatches between available jobs and housing supply.
While not uncontroversial, inclusionary housing practices have clearly
emerged as important and increasingly prevalent policy tools for addressing the
affordable housing crisis in California and nationwide. Today, 107 inclusionary
jurisdictions have been identified in California compared to 64 recorded in 1994.4
At least a dozen other jurisdictions are in the process of adopting or considering
adopting inclusionary housing.
This report lays out the findings of a survey conducted by the California
Coalition for Rural Housing (CCRH) and Non-Profit Housing Association of Northern
California (NPH) during 2002 and early 2003. It provides detailed information about
how local inclusionary zoning programs are structured. It also provides information
on the relative effectiveness of these programs and offers some ideas about what
program features may be key factors in assisting local governments to adopt
policies or ordinances that will actually create more affordable housing. Additional
information about the survey is available online at www.calruralhousing.org and
www.nonprofithousing.org.
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Designs on an old Navy base–City of
Sunnyvale is kicking off a public-private
venture with Sares-Regis Group and the
United States Navy to redevelop a
former base into a mixed-income
residential development, 10 percent of
which will be single-family detached
homes distributed throughout the
development and affordable to low- and
moderate-income families.
(Photo credit:
City of Sunnyvale Housing Division)
2
B. INCLUSIONARY P ROGRAMS IN C ALIFORNIA AND
N ATIONWIDE
Sometimes known as inclusionary zoning, inclusionary housing programs first
took hold in California during the early 1970s, when jurisdictions designed policy
incentives or imposed requirements for the inclusion of affordable units in new
residential developments.
State legislation has since supported this trend, evidenced by the use of
inclusionary requirements in California Community Redevelopment Law5 and in the
California Coastal Act.6 In redevelopment areas, for example, State law requires that
redevelopment agencies ensure that between 15 and 30 percent of new residential
units are affordable. In some jurisdictions, most residential construction is concen-
trated within redevelopment areas and there are no additional inclusionary require-
ments; but, elsewhere, local inclusionary policies are critical
because new development is occurring outside redevelopment
areas as well as within these areas.
Inclusionary housing policies and ordinances in California
have spread dramatically since Petaluma and Palo Alto led the
movement in 1973. As mentioned earlier, there are currently
107 known inclusionary jurisdictions statewide; two-thirds more
than existed in 1994. More than a dozen other jurisdictions,
including the City of Los Angeles, are in various stages of consid-
ering adoption of inclusionary programs.7 (see Fig. 1)
California leads the country in the number of inclusionary
housing programs, but the first programs in the United States
originated in suburban Washington, D. C.,in Fairfax County,
Virginia, and Montgomery County, Maryland, in 1971 and 1973,
respectively. The Virginia Supreme Court later invalidated Fairfax
County’s program under Virginia law, but Montgomery County's
Moderately Priced Dwelling Unit (MPDU) Program has thrived
and is considered one of the most productive in the country.8
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
1990s
48%
2000s
15%
1970s
16%
1980s
21%
YEAR OF ADOPTION
Figure 1
The popularity of inclusionary housing grew
dramatically in the 1990s and the beginning of this
decade, coinciding with growing awareness of
inclusionary housing concepts and steady expansion
of the affordability crisis.
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3Inclusionary Housing in California: 30 Years of Innovation
The New Jersey Supreme Court’s Mt. Laurel decision in 1975, and a subsequent
ruling of that court, provided the earliest legal rationales for inclusionary housing
practices. Seeking to rectify exclusionary local zoning, the cases required all munici-
palities to offer housing opportunities to low- and moderate-income households and
use "affirmative governmental devices…including…mandatory set-asides".9
C. THE G REAT D EBATE
Inclusionary housing practices have aroused considerable controversy. While
local authorities turn to inclusionary policies as a means to ensure affordable hous-
ing provision, opponents, particularly market-rate developers, argue that they may
have harmful market effects.
Market-rate developers argue that requiring production of below-market-rate
units forces them to recover their losses by increasing the prices of their market-
rate units; in other words, shifting costs to moderate- and above moderate-income
renters and homebuyers. Other observers have noted that costs can only be shifted
to consumers if the homes would have otherwise been priced below prevailing mar-
ket prices, and that the willingness and ability of renters and buyers to absorb
these costs is limited. Thus, all or part of the costs will have to be borne by devel-
opers, or passed on to land sellers (through reduced land values). The presence of
an inclusionary program may even dissuade developers from building at all within a
particular jurisdiction, resulting in price increases in the existing stock over time.
Some inclusionary critics go further, arguing that the demand for lower-cost
housing is generally satisfied by the older housing stock, and that price-capping
new units is not the most efficient market intervention. There are numerous other
affordable housing strategies, such as mortgage or rental assistance programs, that
achieve affordability by supporting the consumer.
Inclusionary supporters counter that developer claims regarding costs are
exaggerated, and that current interest in the strategy is tied, in large part, to its
unique strengths as an affordable housing policy. First, by requiring the affordable
housing to be developed as part of larger market-rate developments, it expands the
supply of affordable housing and creates economically diverse communities.
Second, inclusionary housing offers a way for communities to create affordable
housing at little or no cost to local governments. Third, it addresses the challenge
of creating affordable housing in communities in which very little land is deemed
suitable for new housing. In that context, inclusionary housing is essential to
ensuring that the price of housing available within a jurisdiction, particularly ones
that are growing, matches the housing needs of local residents and provides shelter
for a growing workforce. Fourth, simultaneous construction of affordable and
market-rate units reduces the increased costs of producing affordable housing due
to NIMBY (Not In My Back Yard) opposition and resulting lengthy challenges.
These debates, though fierce, remain largely theoretical due to the lack of
empirical research documenting either viewpoint.10 Accordingly, tensions between
local authorities and "free-market" advocates often accompany implementation.
Despite these concerns, inclusionary implementation continues to spread.
D. PAST I NCLUSIONARY R ESEARCH
Over the last three decades, few studies have assessed the effectiveness of
inclusionary programs in California. Only two major statistical evaluations have
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4 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
been published. The first was conducted by researchers at the Kellogg Public
Service Research Program (UC Davis) in 198111 and the second by the California
Coalition for Rural Housing (CCRH) in 1994.12
The Kellogg Public Service Research Program report emphasized the role of
rapidly rising housing costs in necessitating inclusionary programs and assessed
the state of inclusionary projects by adding related questions to the annual Local
Government Planning Survey conducted by the California Office of Planning and
Research. At that time, 18 percent of the polled jurisdictions reported some kind of
incentive program for building affordable housing, in addition to state and federal
subsidies. Approximately 45 percent of jurisdictions with special programs offered
density bonuses for developers for construction of low- and moderate-cost units
and 16 percent gave priority to permit applications that included low- and
moderate-cost units. Thirty-seven percent of the jurisdictions offered fee
waivers, fast-track processing, or other incentives to encourage affordable
housing production.
The CCRH report surveyed cities and counties across the state for specific
policy data on both the existence and design of local inclusionary programs. At that
time, 64 jurisdictions (approximately 13 percent of all California cities and counties)
confirmed the existence of inclusionary housing programs. In 1995, CCRH’s survey
was augmented with academic research that took an historical view of the emergence
and use of California inclusionary programs over two decades.13
This current report fills the information gap by updating the list of confirmed
inclusionary programs and assessing policy strengths and weaknesses. It should be
noted that the findings are based on self-reports by local jurisdictions, not indepen-
dent field investigation. Moreover, they represent a snapshot of existing practice
that is, in fact, quite fluid and changing as increasing numbers of jurisdictions
experiment with their own versions of inclusionary housing.
E. KEY P OLICY I SSUES
In the absence of a statewide approach to inclusionary housing, each jurisdic-
tion in California is free to choose whether or not inclusionary practices are needed
or would be effective in that local context. This freedom has spawned virtually
endless variation in program design, as each jurisdiction molds inclusionary
housing practices to match its local needs and political reality.
Beyond the debate on the general fairness or advisability of inclusionary
housing lies a set of practical questions and concerns for policy-makers and
advocates. What makes a program effective? What are appropriate goals for a policy
or ordinance? What are the key variables or features in balancing developer
concerns and community needs? In essence, what works?
In designing effective inclusionary programs, the most significant policy points
are the:
1. Size of the inclusionary percentage;
2. Income-targeting of the housing;
3. Alternatives to construction on-site;
4. Developer incentives; and
5. Length of affordability.
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5Inclusionary Housing in California: 30 Years of Innovation
This report addresses all of these key features, as well as presents examples
and case studies to supplement the statistical profiles. While not offering a model
ordinance or policy, the statistical profile and individual case studies provide pow-
erful guidance to policy-makers and advocates that can inform local planning and
decision-making.
Central to all these decisions are a few key considerations. First, the political
realties of adopting a policy or ordinance often pit for-profit developers against
"social-equity" advocates, with developers pushing for maximum flexibility and
advocates striving for certainty. The extent to which developers actually have to
produce the units or take actions to ensure production of an equivalent number of
units depends largely on the flexibility of the program.
While alternatives may be crucial to ensure financial feasibility and program
flexibility, too much flexibility can negate any positive policy impact. If in-lieu fees
or land dedication requirements are set too low, developers will consistently opt
out of construction. Allowing off-site construction and design differences threaten
some of the potential benefits of inclusionary programs, such as simultaneous
development of market- and below market-rate units, functional and aesthetic
integration of affordable units into new neighborhoods, and minimization of neigh-
borhood opposition. However, if builders can’t or won’t build, then an inclusionary
program is rendered virtually meaningless. Accordingly, program design and
revision must consider both the benefits and potential limitations of each
policy detail.
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6 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
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The California Coalition for Rural Housing (CCRH) and Non-Profit Housing
Association of Northern California (NPH) initiated the 2002/03 survey to reassess
the use of inclusionary housing practices across California. The survey question-
naire used in CCRH’s 1994 study was modified, updated, and expanded to include
detail on housing production and other program features (see Appendix B). Local
advocates, planning officials and academics were consulted in these revisions and a
final questionnaire was distributed by mail in early April 2002. All planning agencies
listed in the California Planners’ Information Network were contacted, including 58
counties and 467 cities (San Francisco is counted as both a city and county).
To increase the response rate, two rounds of follow-ups were conducted. In
June 2002, the questionnaire was again mailed and telephone contact was made
with non-responding jurisdictions reported to have local programs. In January 2003,
a short follow-up survey was prepared and forwarded to responding jurisdictions
seeking additional information on methodology for determination of in-lieu fees,
total fees collected, income-targeting goals and production numbers. One last effort
was also made to contact non-responding jurisdictions.
In total, 98 jurisdictions returned completed questionnaires accounting for 92
percent of known programs in California. Based on previous studies and Internet
searches of jurisdiction web sites, another nine jurisdictions that did not return com-
pleted questionnaires are judged to have some form of inclusionary housing.14
People's Self-Help Housing Corporation
produced 36 family apartments inside a
Santa Barbara County market-rate
development. While market-rate homes
sell for over $600,000, the affordable
homes helped families in the 35 to 60
percent of area median income range,
including four units dedicated to the
developmentally disabled.
(Photo credit:
Peoples’ Self Help Housing)
Sect 1&2.qx 6/30/03 3:50 PM Page 6
7Inclusionary Housing in California: 30 Years of Innovation
A. NUMBER OF I NCLUSIONARY J URISDICTIONS
As of March 2003, 107 California jurisdictions are known to use local
inclusionary practices to provide affordable housing, outside of the requirements of
redevelopment law. These include cities and counties that require affordable
construction through an ordinance, general plan, or permit approval process.15
This list consists of 12 counties (21 percent of all counties) and 95 cities (20 percent
of all cities). As the map (see p. i) clearly demonstrates, inclusionary housing is
most prevalent in high-cost housing markets in the coastal counties. The most
significant clusters are in the San Francisco Bay Area, metropolitan Sacramento and
San Diego County.
B. MEASURING E FFECTS ON A FFORDABLE H OUSING
P RODUCTION
Although this report is primarily focused on providing a profile of inclusionary
policies and ordinances, the survey also sought to gather data on affordable
housing produced as a result of inclusionary housing practices. About one-third of
known inclusionary jurisdictions reported production numbers accounting for over
34,000 units of affordable housing. In addition, 80 percent of all respondents believe
that their inclusionary program has stimulated the production of affordable
housing that would not have been built otherwise. For those jurisdictions that
did not find inclusionary practices helpful in creating affordable housing, they
generally agree that the principal barriers have been market stagnation or
infrastructure limitations.
Se
c
t
i
o
n
I
I
I
K
EY
F
IN
D
I
N
G
S
See full-sized map on page i.
Sect 3.qx 6/30/03 1:01 PM Page 7
8
C. FORMS OF I NCLUSIONARY P OLICY
Inclusionary policies take the form of either a local ordinance, a General Plan
policy, or a permit approval process that requires or rewards affordable projects.
While the terms "inclusionary housing" and "inclusionary zoning" are often used
interchangeably, in fact, not all inclusionary housing practices are, in practice,
zoning requirements or overlays.
Seventy-eight percent of inclusionary programs are defined by a formal
ordinance and 49 percent are prescribed in General Plans.16 In many cases, the two
are linked; General Plan policies often charge or commit local government to adopt
an ordinance.
Three jurisdictions (three percent of respondents) report no ordinance or
General Plan policy, but have permit approval procedures that promote affordable
production. These jurisdictions are Contra Costa County, Morgan Hill, and
Huntington Beach. Critics argue that this form of inclusionary practice is
inadequate since it is not explicitly required at the individual development or
project level. Instead, annual permitting targets are set or preferences established
within a competitive permitting approval process. This leaves open the possibility
that the more difficult-to-develop, affordable units will be delayed and concentrated
at the end of the permitting period, thereby undercutting the notions of
mixed-income housing and simultaneity of development. All three jurisdictions,
however, report that the permit process regulations have provided affordable units
that would not otherwise have been built.
While adoption of an inclusionary ordinance or General Plan policy is often
needed to establish a clear program mandate, which of the two is more effective in
terms of actual production is difficult to say. Certainly, the passage of a formal
ordinance tends to impose inclusionary requirements in a more permanent and
universal way (applicable to all developments of a certain size), with more formal
procedures and specificity for implementation than does a General Plan policy.
However, there was no statistical correlation between the relative effectiveness of
an inclusionary housing program and whether the policy itself is codified in
ordinance or identified in the jurisdiction’s General Plan or both.
D. VOLUNTARY OR M ANDATORY
Only six percent of jurisdictions responding report voluntary programs, which
allow more flexibility for developers but compromise local ability to guarantee
affordable housing production. Los Alamitos and Long Beach both specifically
blame the voluntary nature of their programs for stagnant production despite a
market-rate boom. In general, our research indicates that the voluntary programs
do not cause market rate developers to build or facilitate affordable units unless
including affordable housing makes an application more competitive in the permit
approval process.
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Sect 3.qx 6/30/03 1:01 PM Page 8
9Inclusionary Housing in California: 30 Years of Innovation
E. INCLUSIONARY R EQUIREMENT AND P ROJECT S IZE
Variation from jurisdiction to jurisdiction in the percentage of units required to
be affordable is significant, ranging from four to 30 percent. The average require-
ment in rental developments is 13 percent, which is also the average requirement
for ownership housing. The most commonly found inclusionary percentage is ten
percent. However, approximately half of all jurisdictions require at least 15 percent
and nearly one-quarter require 20 percent or more.
In many cases, the inclusionary percentage is only applied to projects over a
certain size, commonly ranging from three to ten units. As Figures 2 and 3 indicate,
there is relatively little difference between the percentage requirements for rental
vs. ownership. For example, the City of San Anselmo reports that no inclusionary
units have been built because the inclusionary requirement is only required of
projects over 10 units, and all developments in recent years fell below this
threshold. In 20 percent of jurisdictions, the inclusionary requirement is applied to
all developments, regardless of size. Typically, smaller projects are allowed to
meet the inclusionary goals differently than larger projects (in 42 percent of
MORGAN HILL
In general, jurisdictions with voluntary or incentive-only policies report that
their policies did not produce the desired affordable housing. However,
Morgan Hill in southern Santa Clara County is a notable exception. Morgan
Hill accomplishes its inclusionary housing goals through its Residential Growth
Management Policy, which limits the number of residential permits issued per
year. The growth management policy is effectively a competition among poten-
tial projects. As part of the intense competition for permits, providing inclu-
sionary affordable housing is worth as many as 13 points. In order to score high
enough in the competition to get the permits for the overall development,
builders must voluntarily choose from a set of inclusionary housing options.
To date, the policy has created over 300 units of affordable housing.
Case Study
Less than 10%
10% to 14%
20% or More
15% to 19%
4%
45%
25%
26%
PERCENT OWNERSHIP REQUIRED
Less than 10%
10% to 14%
20% or More
15% to 19%
4%
47%
23%
26%
PERCENT RENTAL REQUIRED
Figure 2 Figure 3
Figures 2 and 3 indicate the percentage of inclusionary units required for rental and ownership developments.
Although there are some slight variations due to a few unique programs, the vast majority of jurisdictions
require the same percentages regardless of tenure type.
Sect 3.qx 6/30/03 1:01 PM Page 9
10 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
jurisdictions), more often than not through the payment of
in-lieu fees. Still others require different percentages based
on project or parcel size, as is the case in the City of Davis,
where rental developments of over 20 homes must provide
35 percent of the homes as affordable versus 25 percent for
rental projects under 20 units.17
F. I NCOME-TARGETING
Most jurisdictions require that inclusionary homes be
made affordable and offered to a pre-determined income
group, rather than providing developers with discretion or
choices about whom to serve. Nonetheless, some jurisdic-
tions do provide developers with options, such as providing
a higher percentage of units to moderate-income house-
holds versus a lower percentage to very low-income house-
holds.18 For example, the City of Richmond in the San
Francisco Bay Area provides developers the option of
providing 10 percent of the units to very low-income house-
holds, 15 percent of the units to low-income households, or
17 percent of the units to moderate-income households.
As demonstrated by Fig. 4, most programs target some
percentage of their inclusionary homes to low- and moder-
ate-income households, 87 percent and 76 percent, respec-
tively. Fewer than half of the programs (48 percent) target
very low-income households. In 59 percent of jurisdictions,
such as the City of Sacramento, no distinction is made
between income-targeting for rental units versus units for
ownership. Of the other 41 percent of cases, the income-tar-
geting is linked to form of tenure. In these instances, rental units are often targeted
to low-income households and for-sale units to moderate-income households.
Many inclusionary policies have been adopted in order to address the
requirements of Housing Element law. For example, Calavita and Grimes found that
all eight of the San Diego County jurisdictions with inclusionary programs had
adopted inclusionary housing in order to compensate for past under-production in
particular income categories.19
Because not all jurisdictions
provided reliable data on the actual
income limits of inclusionary units
already produced, it is not possible
to assess accurately who the actual
beneficiaries of these policies are
without more extensive and
verifiable field research at the local
community and project levels.
0%
20%
40%
60%
80%
100%
Moderate-Income
(80%-120% AMI)
Low-Income
(50%-80% AMI)
Very Low-Income
(<50% AMI)
48%
87%
76%
INCOME-TARGETING
Housing Elements are state-mandated
local plans for meeting housing needs,
which are periodically required to be
updated. The Housing Element is part of
each locality’s General Plan, its constitu-
tion for growth. Every Housing Element
must show that the jurisdiction has
adequate land zoned appropriately to
accommodate its projected housing
need for all income levels.
THE HOUSING ELEMENT
Figure 4
Nearly all inclusionary housing programs in California
target low-income households. Moderate-income
housing is, in most cases, only a target in ownership
housing. Likewise, very low-income households
are typically only within new rental
housing developments.
Sect 3.qx 6/30/03 1:01 PM Page 10
11Inclusionary Housing in California: 30 Years of Innovation
G. ALTERNATIVES TO C ONSTRUCTION O N -SITE
The most common alternatives to on-site construction are in-lieu fees and land
dedications. In addition, developers are sometimes allowed to build the affordable
housing off-site or receive credit for excess affordable units built in previous pro-
jects through credit transfers.
The flexibility with which policies and programs regulate developers varies
greatly from jurisdiction to jurisdiction. The table below shows that the majority of
jurisdictions allow in-lieu fees or off-site construction, 81 percent and 67 percent,
respectively. Often, these two alternatives are offered within the same program; in
55 jurisdictions (54 percent), both strategies are allowed.
In-Lieu Fees
In-lieu fees are among the most controversial elements of inclusionary housing.
While most jurisdictions offer in-lieu fees as a potential option, there is relatively
little standardization in terms of calculating in-lieu fees or determining at whose
discretion the in-lieu fee is an option. In-lieu fees can significantly affect levels of
affordable construction, not only because they allow developers to pay instead of
build, but also because the methods of calculation and uses of in-lieu fees can
render them relatively ineffective. On the other hand, in-lieu fees can provide
jurisdictions with the funds to subsidize affordable housing that serves people of
even lower incomes or create supportive housing for people with special needs,
such as mental health or substance abuse problems. In addition, in-lieu fees can be
Developer can pay a fee into a local
fund instead of constructing the
required affordable units. Often,
fees are calculated per unit or per
square foot for each unit not built.
Developer can substitute a gift of
land that may accommodate an
equivalent number of units in place
of affordable unit construction.
Developer can credit affordable
units built beyond the inclusionary
requirement in one project to satis-
fy the requirement in another.
Developer can build the affordable
units at a different site than the
market-rate units, sometimes condi-
tioned on agreeing to increase the
number of affordable units to be
built.
Allowed by 81% of surveyed juris-
dictions (N=102)
Allowed by 43% of surveyed juris-
dictions (N=93)
Allowed by 20% of surveyed juris-
dictions (N=93)
Allowed by 67% of surveyed juris-
dictions (N=96)
COMMON ALTERNATIVES TO ON-SITE CONSTRUCTION
In-Lieu Fees
Land Dedications
Credit Transfers
Off-Site Construction
Sect 3.qx 6/30/03 1:01 PM Page 11
12 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
used in conjunction with other housing funds, such as the federal and state
Low-Income Housing Tax Credit or the State of California’s Multi-Family
Housing Program.
Jurisdictions vary greatly in terms of how they calculate in-lieu fees, often
based on either construction costs or potential revenue. Typically, the dollar total
of fees collected is not sufficient to produce the same number of units that would
have been produced had developers opted to build the units themselves. For
example, in fast-growing Patterson in San Joaquin County, the in-lieu fee per
affordable unit required is a mere $7,340. Despite a ten percent inclusionary require-
ment and growth of 750 units since the policy was enacted, the jurisdiction reports
that its inclusionary program has created only five units of affordable housing since
implementation. The County of Santa Cruz, on the other hand, has a $272,889 fee
per affordable unit. A more typical case is Livermore in Alameda County, whose fee
in 2002 was $122,720 per affordable unit—below what is actually needed to create
the unit, but significantly increased from its previous level.
When in-lieu fees have been set below the level needed to actually fund new
construction, they can undermine the program goals, as it is in the developer’s
clear financial interest to simply pay the fee. Therefore, a jurisdiction with a
20 percent inclusionary requirement but a low in-lieu fee might effectively create
less affordable housing than a jurisdiction with a ten percent requirement and fewer
or less appealing alternatives to construction. To ensure that policies or ordinances
produce results in keeping with their goals, the required fee should be high enough
either to dissuade developers from opting out of construction or enable the city to
finance construction of an equivalent number of affordable units elsewhere.
Some cities use in-lieu fees not for new construction, but for homeownership
downpayment assistance or rental assistance programs, such as in the City of
Coronado in southern California. While consumer subsidies are needed forms of
housing assistance, they only indirectly affect production by increasing effective
demand and do not ensure that supplies of affordable housing will increase.
Silver Spur Drive is one of three
affordable housing sites located within
Bellevue Ranch in Santa Rosa (Sonoma
County). Burbank Housing Development
Corporation received land from the
market-rate developer to provide
homeownership opportunities for
54 families and individuals seeking
affordable housing.
(Photo credit: Burbank Housing
Development Corporation)
Sect 3.qx 6/30/03 1:01 PM Page 12
13Inclusionary Housing in California: 30 Years of Innovation
In many cases, respondents credit a low in-lieu fee option with reducing the
effectiveness of inclusionary mandates. According to the survey data, 80 percent of
jurisdictions that reported numbers for affordable housing production allow in-lieu
fees to be paid. Production numbers in these jurisdictions ranged from zero to
levels commensurate with the outcomes anticipated by their policy goals. In other
words, the in-lieu fee option may offer a way out for some developers who are not
willing or able to construct affordable units themselves, but it does not necessarily
impede affordable housing production in every case.
The freedom with which developers can choose fee payment also depends on
policy design. In Davis, developers of smaller projects are allowed the in-lieu fee
option only under circumstances of "unique hardship" as defined by the City
Council. Many other jurisdictions allow the in-lieu fee option more freely, sometimes
allowing developers to choose fee payment in all instances, or all developments
below a certain size. In the case where an inclusionary formula obligates a
developer to produce a fraction of an affordable unit, some jurisdictions require
payment of in-lieu fees, instead of waiving the obligation entirely (see Case Study:
Monterey County).
Those jurisdictions that successfully produce affordable housing while using
the in-lieu fee offer clues for effective policy design. The County of Monterey and
Port Hueneme require that developers request permission to pay the in-lieu fee;
MAKING EVERY UNIT COUNT IN MONTEREY
COUNTY – THE IMPORTANCE OF IN-LIEU FEES
In-lieu fees currently feed the engine driving Monterey County’s inclusionary
housing production. Since 1980, developers have constructed 448 units to
directly satisfy inclusionary requirements, while 940 units have been created
with assistance from in-lieu fees and other funds. In-lieu fees are an option for
developers of small projects (seven units or less) and are based on the replace-
ment cost of an affordable unit and the financing gap between affordable and
market housing costs. For example, a project in the coastal zone of the County
would pay an in-lieu fee of $339,636 per affordable unit required, which repre-
sents the difference between the average total development cost of $546,000
and the affordable sales price for a family of four at 100 percent of area median
income, which is currently $206,364.
While other jurisdictions often waive requirements entirely in small projects,
unincorporated Monterey County has greatly benefited from the in-lieu fees col-
lected on each of these small projects, using funds for new construction and
acquisition/rehab projects. County planners note that, in the absence of an inclu-
sionary policy, high land costs would prevent construction of affordable units.
Monterey County requires permanent affordability for rental units, and impos-
es resale controls on homeowners who sell within 30 years. As of this writing,
the County expects to amend its program by increasing inclusionary require-
ments to 20 percent (currently 15 percent), making the program mandatory for
all developers, extending resale restrictions in perpetuity, eliminating the option
for off-site construction, lowering the threshold for the in-lieu fee option to five
units, and crafting developer incentives.
Case Study
Sect 3.qx 6/30/03 1:01 PM Page 13
14
projects are only allowed to use the in-lieu fee under certain circumstances
defined on a case-by-case basis. This strategy avoids the overuse of the in-lieu
fee alternative.
Land Dedications
As noted above, 43 percent of jurisdictions responding allow land dedication
instead of construction. This alternative faces similar challenges to in-lieu fees, in
that the amount of land required to substitute for construction (similar to the
amount of fees generated) must be large enough to ensure production of an
equivalent number of units. Land dedications are most effective in areas where land
is scarce and the cost is high; where the absence of land that is available for
development and reasonably priced makes affordable housing development very
difficult. In these environments, land dedications are most likely to yield significant
resources for housing development.
A prerequisite for successful land dedication is that affordable units will be
built on the dedicated land. Local governments must assume responsibility for this
construction and often recruit non-profit developers to complete the task.
Typically, the land is deeded to the jurisdiction, which then deeds it to a
community-based non-profit on a competitive basis, or is deeded directly by the
developer to a nonprofit organization.
Edgewater Place in Larkspur in Marin County is a 50-unit development built by
EAH, Inc. on land dedicated by an adjacent condo developer. In this case, the land
dedication allowed for double the number of units required under the policy by
combining the land with funding from other sources.
Ensuring construction on dedicated land can be problematic. Portola Valley in
the San Francisco Bay Area, for example, reports that the land dedication option
may be revoked because the local government has been unable to advance develop-
ment on four lots previously dedicated to it. Ideally, the land to be dedicated should
be integrated into, or contiguous to, the proposed market-rate development.
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Edgewater Place in Larkspur in Marin
County, a 50 unit development built by
EAH, Inc. on land dedicated by adjacent
condo developer. In this case, the land
dedication allowed for double the
number of units required under the policy
by combining the land with funding from
other sources.
(Photo credit:
Tom Jones, California Futures Network)
Sect 3.qx 6/30/03 1:01 PM Page 14
15Inclusionary Housing in California: 30 Years of Innovation
The construction of affordable units on isolated plots of land may undermine the
economic and social integration that many inclusionary policies aim to create.
Ultimately, the success of land dedications depends on the quality of the
land being dedicated, including its size and shape, location, the existence of
adequate sewer and water capacity and other infrastructure, and environmental
limitations; the capacity of local developers, especially non-profit organizations,
to undertake the development; the availability of financing to improve the land
and build and operate the housing; and the level of public acceptance by the
surrounding community.
Off-Site Construction
The allowance that affordable units may be built off-site also challenges the
inclusive goals of inclusionary policy. Debate arises over whether programs should
permit off-site development if that is the best way to maximize the number of afford-
able units that can be developed or, conversely, whether it is more important to
insist on integrated development on-site even if such development yields fewer units.
As noted above, the location of affordable units on an isolated site restricts the
extent to which new development can promote residential integration. In some
cases, programs require that developers building off-site include more than the
inclusionary allotment of affordable housing. This strategy attempts to justify the
isolated construction by ensuring a greater number of affordable units, arguably the
highest priority of inclusionary policy overall.
Off-site construction issues are particularly relevant when considering partner-
ships between for-profit and non-profit developers. In some cases, developers team
CHOOSING PRODUCTION OVER INTEGRATION
IN LIVERMORE
Livermore’s inclusionary program is dedicated to boosting the affordable
housing stock as the top priority, with secondary concern for integration.
The program was first implemented in 1986 and has since become an inte-
gral part of the permit approval process. With a Residential Growth
Management Policy as part of the General Plan, Livermore restricts residential
development through a competitive permit selection process. Inclusionary
requirements must be met as part of this review and project proposals that pro-
vide 35 to 50 percent affordable may bypass the selection process completely.
By discretion of the City Council, off-site construction, in-lieu fee payment, or
land dedications are considered, and the city claims to be flexible wherever
affordable construction can be maximized.
Accordingly, Livermore reports that in-lieu fees have helped create some 600
affordable units. Livermore calculates the in-lieu fee as 10 percent of the differ-
ence between the cost of developing the market-rate unit and the maximum
affordable purchase price for a unit of that size. As of 2002, that calculation
resulted in a fee of over $120,000 per affordable unit. Fee collections finance
Affordable Housing Fee Fund activities, including mortgage and rental subsi-
dies, new construction and rehabilitation.
Case Study
Sect 3.qx 6/30/03 1:01 PM Page 15
16
up to satisfy the inclusionary requirements; the for-profit developer builds the
market-rate units and the non-profit builds the affordable units off-site on land it
controls with funding support provided by the former. While this strategy allows
each developer to exercise its expertise and appears to be a win-win proposition
for all parties, the segregating effects should not be overlooked. In contrast to the
land dedication option where jurisdictions can be left with no means to develop the
dedicated land, off-site construction requires the developer to be responsible for
actual development.
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Inclusionary housing practices relate to efforts to curtail sprawl and create
"smart growth." State law requires all jurisdictions to provide density bonus-
es as a means of incenting affordable housing. Such bonuses also encour-
age higher-density construction, a key outcome for reducing sprawl and
encouraging transit. Unfortunately, in practice, development standards such
as high rear and front yard setbacks and parking requirements can under-
mine a developer’s ability to use the density bonus effectively.
The relationship with sprawl and growth is even more confusing in jurisdic-
tions with permit metering. In these instances, local policies or ordinances
attempt to slow growth by imposing caps on the number of residential per-
mits that be issued each year. This often creates a highly competitive permit
application process in which affordable housing inclusion can become a bar-
gaining tool, such as in Livermore or Morgan Hill. While the overall con-
straint on housing supply is problematic for affordable housing, the policies
often attempt to mitigate the impacts by increasing the number of affordable
units that are produced under these circumstances.
INCLUSIONARY HOUSING AND
SMART GROWTH
CARLSBAD—THE BENEFITS OF FLEXIBILITY
Acity of nearly 88,000 inhabitants in San Diego County, Carlsbad initi-
ated its inclusionary program in 1993 during a period of fast resi-
dential growth. Impetus for the program came from a need to satis-
fy housing element requirements; before this time little affordable housing
was produced. Despite effectively increasing the supply of affordable hous-
ing, the city still struggles to design adequate mechanisms to ensure con-
tinued affordability.
The ordinance requires 15% of all new residential development to be
affordable to low-income residents, with an in-lieu fee option for projects
of less than six units; larger developments are required to build. Land ded-
ications are not regularly used, yet when the city joined a deal to finance a
large affordable complex, some unassigned affordable units planned for
construction were bought by small developers to satisfy their inclusionary
requirements from other projects. Carlsbad’s Housing and Redevelopment
Agency, emphasizes the importance of (1) requiring construction instead of
allowing in-lieu fees indiscriminately, (2) setting in-lieu fees high enough to
encourage construction and fund development elsewhere and (3) mandat-
ing concurrent construction to reduce social resistance.
Case Study
Sect 3.qx 6/30/03 1:01 PM Page 16
17Inclusionary Housing in California: 30 Years of Innovation
H. DEVELOPER I NCENTIVES
Various incentives are offered to developers to promote the construction of afford-
able housing. These incentives can be critical. Some jurisdictions stimulate significant
numbers of affordable units by granting development benefits for those projects that
either fulfill or exceed the inclusionary percentage. Some jurisdictions credit incentives
for the success of their inclusionary program, claiming they have directly contributed to
increases in actual affordable production. (See Fig. 5)
Density bonuses are by far the most popular incentive offered to developers to
build affordable housing, reported by 91 percent of the respondents. There is some
question, however, whether this density bonus can be used in some jurisdictions
due to parking, set-back and other requirements that effectively negate efforts to
increase density. In some cases, developers may opt to build at less than the maxi-
mum allowable density in order to maximize the amount of non-residential space for
project facilities and open areas and minimize the density concerns of neighbors.
Other incentives were fast-track processing (45 percent), followed by subsidies
(43 percent), design flexibility (40 percent), fee waivers (39 percent), fee reductions
(32 percent), and fee deferrals (25 percent).
Design flexibility often means requiring identical or similar exteriors but allow-
ing variations in internal features in order to facilitate financial feasibility for devel-
opers. While design differences between market- and below market-rate units might
SUBSIDIZING INCLUSIONARY HOUSING
Roseville, a rapidly growing suburb of Sacramento, adopted a General Plan
policy in 1988 mandating housing affordability. Each plan area is required
to meet a 10 percent inclusionary requirement, but the specific plan man-
dates different percentages on different parcels within each area. When City
funding is not available to assist construction of below-market units, the
requirement is waived entirely. The program has produced over 2,000 units of
very low-, low-, and moderate-income housing since adoption of the policy. As
required, 75 percent of affordable units constructed have been rental units.
Case Study
0% 20% 40% 60% 80% 100%
Density Bonus
Fast Track Processing
Design Flexibility
Growth Control Exemption
Tax Abatement
Fee Waiver
Fee Deferral
Fee Reduction
Subsidies
% of Jurisdictions that Offer Incentive
In
c
e
n
t
i
v
e
DEVELOPER INCENTIVES
Figure 5
Beyond the State-mandated requirement
for density bonuses, the most common
incentives offered to developers are local
financial assistance (e.g., subsidies,
reduced or waived fees, etc.), faster permit
processing, and design flexibility.
Sect 3.qx 6/30/03 1:01 PM Page 17
18
ease the burden for developers,
jurisdictions struggle to avoid the
neighborhood opposition and social
stigma that can come with housing
that stands out because of external
design standards that are compro-
mised or lowered to reduce costs.
The City of Livermore in Alameda
County takes these issues into
account by requiring "comparability
of units" in its inclusionary program.
This is defined in terms that reflect
the goals of integration common in
many communities: "From the street,
the reserved units must not be
distinguishable from other units in
the project." Nonetheless, Livermore
does allow for design flexibility on
the interiors, focusing its attention
on comparable numbers of bed-
rooms and bathrooms, and like
amenities such as air conditioning
and laundry facilities.
The relatively high percentages
of respondents providing subsidies,
as well as various fee concessions as
incentives, indicates that many juris-
dictions are "paying" for inclusionary
housing, either by direct cash assis-
tance, foregone revenue, or both. In other
words, developers in these communities are
not bearing 100 percent of the cost of
earmarking a percentage of their units for
affordable housing. Unlike direct housing
subsidies, however, it is not clear whether
fee concessions actually secure a specific
public benefit, such as longer-term afford-
ability. Because the depth of subsidy was
only reported by a few jurisdictions, future
research in this area would be helpful.
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
While there is general agreement on
the value and the mechanisms for
ensuring long-term affordability of
rental housing, for-sale housing is a
more complicated picture. On the one
hand is the desire to enable low-and
moderate-income homebuyers to
accumulate equity (wealth), which is
one of the main benefits of homeown-
ership in this country. On the other
hand is the desire to ensure that pub-
lic policy and investment assists more
than just the one household that ini-
tially buys an affordable home.
The City of Palo Alto, in the heart of
Silicon Valley, has emphasized long-
term affordability. The city has one of
the oldest inclusionary housing poli-
cies in the state, having first adopted
as a general plan policy in 1975. Since
that time the policy has led to the cre-
ation of 253 inclusionary units. Palo
Alto not only records a 59 year afford-
ability requirement on the deed for
affordable ownership housing, the
City goes one step further by retaining
the right to purchase the home on
resale. The City only assigns this right
to a buyer from their waiting list. Then
the City places a new 59 year deed
restriction on the home, in essence
creating permanent affordability.
THE CHALLENGE OF
LONG-TERM AFFORDABILITY
Technically speaking, all jurisdictions
in California are required to offer a
density bonus per state law.
Government Code Section 65915 pro-
vides that a local government shall
grant a density bonus of at least 25
percent and an additional incentive or
financially equivalent incentive(s), to a
developer of a housing development
agreeing to construct at least: a) 20
percent of the units for lower-income
households; or b) 10 percent of the
units for very low-income households;
or c) 50 percent of the units for senior
citizens. Other incentives might
include reduced parking requirements,
reduced setbacks, fee waivers, or
other concessions identified by the
developer or jurisdiction.
STATE DENSITY BONUS LAW
(Continued on p. 19)
Sect 3.qx 6/30/03 1:01 PM Page 18
19Inclusionary Housing in California: 30 Years of Innovation
Interestingly, cities that allow the
use of alternatives under specific
conditions have been more successful
than cities without those conditions.
Monterey County’s success is likely
due to the use of: (1) restrictions on
the use of the in-lieu fee option;
and (2) incentives for developers to
construct more than the required
number of affordable units. In-lieu
fees are only permitted under excep-
tional circumstances and are
used specifically to buy land for
affordable housing.
I. LENGTH OF
A FFORDABILITY
Ensuring that new affordable
units stay affordable is another
problematic issue. Some jurisdictions
report the loss of affordable housing
stock because there were not
adequate requirements or monitoring
mechanisms in place to guarantee
continued affordability. Affordable
rents can easily be recalculated for
subsequent renters and are typically
offered by non-profit and for-profit
ownership entities subject to
long-term use agreements or deed
restrictions that are conditions of the
underlying financing. Restricting
homeowners from reselling
affordable units at market-rate prices
or requiring equity-sharing are much
more difficult to regulate and require
sustained and active monitoring by local officials.
One stunning example of the consequences of such policy failures is the City of
Irvine in Orange County. Because the city had no system for resale control prior to
2001, almost all of the 1,610 ownership units created before that time are no longer
part of the affordable housing stock, having now been resold at market prices.20 In
contrast, the City of Palo Alto in Santa Clara County has a 59-year deed restriction
on its inclusionary ownership units, which is reset each time a home is sold or refi-
nanced, achieving something very close to permanent affordability. Palo Alto also
retains the right to purchase the home upon resale and only assigns this right to a
buyer from its waiting list.
Virtually all jurisdictions now report that they have formal mechanisms to
maintain affordability over time. Deed restrictions, resale controls, and rental
contracts are the most common means by which affordability is ensured. These
The college town of Davis has one of
the tightest housing markets in the
Central Valley. Since 1974, the City has
worked to meet its affordable housing
needs through an inclusionary policy
that requires an ambitious 25 to 35
percent of new units be affordable to
very low-, low-, and moderate-income
households. Like other cities produc-
ing for-sale affordable units, Davis has
long struggled to keep such units
affordable. Originally, restrictions only
applied to the initial homebuyer, a
problem that translated into the loss of
affordable units once that buyer sold
their home. Among the strategies
employed by the city over the years
were a limit on price appreciation,
seven-year restrictions on for-sale
units, and in one instance, limiting the
resale price in perpetuity. Recently, the
City has turned to a very different
approach, selling a group of for-sale
units to a limited equity cooperative.
The limited equity structure allows co-
op members to enjoy some of the ben-
efits of homeownership, including res-
ident control and appreciation of their
share of the co-op, while ensuring
affordability for future residents. Davis
plans to continue using this model in
future developments.
THE CHALLENGE OF
LONG-TERM AFFORDABILITY (CONT’D)
Sect 3.qx 6/30/03 1:01 PM Page 19
20
restrictions range from periods of ten years to perpetuity with the median length
for rental housing of 42 years and for-sale housing of 34 years. Permanent
affordability is reported in 20 percent of programs for both rental and for-sale.
Over the last decade, many jurisdictions have chosen to amend their policies
or ordinances to address deficiencies in this area. In fact, nearly 50 percent of all
jurisdictions have amended their ordinances at least once, many in the last five
years. In doing so, many jurisdictions have increased the term of affordability to 55
years or permanent affordability. Many have adopted new policies or mechanisms
to address the particular challenge of monitoring and maintaining the affordability
of for-sale units.
Nonetheless, monitoring of units remains an area of obvious concern. Many
jurisdictions declined to answer survey questions related to monitoring and
overall tracking of inclusionary production. Among those that responded, most
cities and counties report that they assume overall responsibility for monitoring
long-term affordability, but it is unclear from discussions with local staff just
how effectively those units are monitored. The high incidence of incomplete
responses on tracking of units, in particular, leads the researchers to believe that
greater emphasis on monitoring and tracking is needed.
J. OBSTACLES TO I MPLEMENTATION
Local officials cite a number of factors that complicate or undercut successful
implementation of inclusionary programs. The principal obstacle is scarcity of land
for development, noted by 59 percent of jurisdictions, followed by developer opposi-
tion, noted by 39 percent. Lack of funding and community opposition are obstacles
in 31 percent and 19 percent of jurisdictions, respectively. Other respondents cite
high land prices and inadequate public works infrastructure as challenges to the
development of new affordable housing.
Developer opposition arises from the perspective that inclusion of affordable
housing in market-rate developments is financially prohibitive and/or unfairly shifts
costs to moderate- and above moderate-income families via higher sales prices and
rents. Moreover, profit-motivated builders argue that they are unfairly forced to
shoulder the financial onus for affordable housing provision that should rightly be
borne by the public sector in partnership with below-market-rate developers in the
business of developing and operating affordable housing.
In the face of enormous housing needs, expectations are shifting in the
contemporary development scene. Accepting the task of building or supporting
affordable housing will require for-profit developers to adapt. While it is not
surprising that there is resistance, the market arguments that inclusionary policies
will stifle construction or dramatically increase market-rate real estate prices have
yet gone unproved. During the 1990s, construction rates and permit valuations
remained steady or rose in inclusionary jurisdictions, as they did statewide.
Anecdotal reports confirm that developers continue to build and that more newly
constructed units are affordable as the result of local inclusionary programs.
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Sect 3.qx 6/30/03 1:01 PM Page 20
21Inclusionary Housing in California: 30 Years of Innovation
Se
c
t
i
o
n
I
V
C
ON
C
L
U
S
I
O
N
A. IN S UMMARY – PROGRAM C OMPARISON
The rapid expansion of inclusionary housing in California over the last 30
years has aroused considerable debate. Advocates on both sides of the issue have
raised questions about the impact of various kinds of inclusionary policies.
In this section, we attempt to answer some of the critical questions pertaining
to inclusionary implementation and
make policy recommendations based
on the experience of the 15 most
successful programs as measured by
sustained and significant production
of affordable housing.
Although the data collected
from the survey do not provide
definitive answers, it is instructive to
compare the 15 programs regularly
producing affordable housing with
the other 92 programs in the state,
some of which have struggled to
achieve consistent production.21 We
recognize that no simple statistical
comparison can measure a program’s
success without understanding the
particular local contexts involved.
Likewise, it may very well be that the
local variability of inclusionary pro-
grams is a key to their success—
certainly this appears true in
political terms.
B. CRITICAL Q UESTIONS IN
I NCLUSIONARY I MPLEMENTATION
Does a strong inclusionary policy discourage overall
housing production?
Perhaps not surprisingly, it appears that the jurisdictions producing the most
inclusionary units are those that have experienced rapid expansion. These jurisdic-
tions have managed to harness their exceptionally rapid population growth to stim-
ulate affordable housing production. Respondents who offered comments on the
subject believe their policy has not hindered overall housing production.
Cities
Carlsbad
Chula Vista
Davis
Emeryville
Huntington
Beach
Irvine
Petaluma
Roseville
Sacramento
Salinas
San Diego
San Rafael
Santa Rosa
Counties
Monterey
Santa Barbara
TOP 15 AFFORDABLE
HOUSING PRODUCERS
POPULATION 15 MOST PRODUCTIVE OTHER
CHARACTERISTICS PROGRAMS PROGRAMS
Rate of population growth, 25% 14%
1990-2000 [mean]
Population [mean] 238,158 94,921
POPULATION CHARACTERISTICS OF JURISDICTIONS PRACTICING INCLUSIONARY HOUSING
Based on annual production since
adoption (alphabetical).
Sect.4.qx 6/30/03 1:02 PM Page 21
22
One of the key measurements of a policy’s strength is the percentage of units
required to be affordable. Interestingly, the more productive programs had similar
percentage requirements to those of the other programs. This would seem to
indicate that the results of a program depend heavily on other factors. One
respondent commented that his jurisdiction had to reduce inclusionary
requirements from 25 percent to 20 percent of all units produced to make the
program effective, while four respondents recommended raising the percentage of
units currently required to make their programs more effective.
In contrast, comparison shows that deep income-targeting is a feature of many
policies that produce a significant number of units. In fact, the most productive
programs are more likely to target low- and very low-income households and less
likely to target moderate-income households. On the surface, this would seem
counter-intuitive; programs with relaxed or higher targeting would seem more likely
to produce greater numbers of units than programs with more stringent targeting.
What this analysis suggests is that deeper targeting does not, in and of itself,
discourage production and, perhaps, coupled with staff commitment, funding
resources, and other local factors, can create an environment for success.
Can a voluntary program be as effective as a mandatory program?
Only six jurisdictions responding to the survey identified their policy as volun-
tary. None of these jurisdictions was among the most productive and three reported
no production of inclusionary units at all. Programs classified as "mandatory with
exceptions" because they allow developers to avoid inclusionary requirements
under certain conditions, such as small project size or lack of funding, appeared in
both groups. Although truly voluntary programs are generally unsuccessful in pro-
ducing affordable units, mandatory programs with exceptions are not necessarily
less effective simply because they permit exceptions.
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
% REQUIREMENT 15 MOST PRODUCTIVE PROGRAMS OTHER PROGRAMS
RENTAL OWNERSHIP RENTAL OWNERSHIP
Less than 10% 7% 13% 4% 3%
10-14% 40% 33% 45% 43%
15-19% 33% 27% 23% 21%
20% or more 20% 20% 22% 22%
PERCENTAGE OF NEW UNITS REQUIRED TO BE AFFORDABLE
INCOME-TARGETING 15 MOST PRODUCTIVE OTHER
PROGRAMS PROGRAMS
Very Low-Income 60% 42%
Low-Income 87% 71%
Median-Income 53% 65%
INCOME GROUPS TARGETED BY INCLUSIONARY PROGRAMS
Sect.4.qx 6/30/03 1:02 PM Page 22
23Inclusionary Housing in California: 30 Years of Innovation
Do alternatives to construction promote the production of afford-
able housing or merely provide a loophole for developers who want
to avoid inclusionary requirements?
The highly productive programs are more likely to permit most alternatives to
construction than other programs. In-lieu fees are permitted by a high percentage of
all programs, although somewhat less often by the most successful programs.
The success or failure of an in-lieu fee option is likely to depend on the way the fee
is calculated, as well as the ways in which collected funds are used. This correlation
suggests that flexibility is not inimical to program success, provided it is
accompanied by appropriate controls to ensure that units are still produced.
Should jurisdictions allow owners to "opt out" of inclusionary
requirements altogether, based on small project size or infeasibility?
Of the most productive programs, none allow exemptions to inclusionary
requirements based on infeasibility. The most productive programs are also slightly
less likely than other programs to allow exemptions based on small project size.
MANDATORY / 15 MOST PRODUCTIVE OTHER
VOLUNTARY PROGRAMS PROGRAMS
Voluntary 0% 7%
Mandatory with Exceptions 33% 32%
Mandatory 67% 61%
MANDATORY AND VOLUNTARY INCLUSIONARY PROGRAMS
ALTERNATIVES TO 15 MOST PRODUCTIVE OTHER
CONSTRUCTION PROGRAMS PROGRAMS
Off-Site Allowance 86% 64%
Land Dedication Allowance 60% 39%
In-Lieu Fees 73% 80%
Developer Credit Transfer 33% 17%
ALTERNATIVES TO CONSTRUCTION ALLOWED BY INCLUSIONARY PROGRAMS
EXEMPTIONS 15 MOST PRODUCTIVE OTHER
PROGRAMS PROGRAMS
Small project size 67% 82%
Infeasibility 0% 15%
EXEMPTIONS PERMITTED BY INCLUSIONARY PROGRAMS
Sect.4.qx 6/30/03 1:02 PM Page 23
24 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
What incentives help developers produce affordable units?
The most productive programs were much more likely than the other
programs to subsidize the construction of affordable units (71 percent vs. 38
percent). The substantial difference suggests that funding is an important facet of a
successful inclusionary program. There was little difference between productive
programs and less productive programs with respect to other incentives offered.
What prevents inclusionary programs from being successful?
Respondents identified a number of obstacles to the production of inclusion-
ary units. Among the most productive programs, lack of funding was the most com-
monly cited concern, listed by 67 percent of these respondents compared to only
24 percent of the others. On the other hand, scarcity of land was much more likely
to be identified as an obstacle by the less productive programs (64 percent vs.
33 percent). Respondents from both groups frequently mentioned developer
opposition as a significant obstacle to construction of affordable units.
Several considerations help explain why jurisdictions producing more units
perceive the obstacles to inclusionary production differently. Since land is a prereq-
uisite for all new construction, jurisdictions with a limited supply of land are much
more likely to find themselves producing fewer units each year than other jurisdic-
tions. In other words, programs producing fewer units may be more restricted in
terms of their available land. The more productive jurisdictions’ greater concern
about funding is probably due to a couple of factors. One is that these jurisdictions
were also more likely to report that subsidies were provided for inclusionary units,
implying that limited funding would truly harm these programs’ ability to produce.
Also, jurisdictions might be less likely to single out limited funding as a problem
when other barriers frequently prevent a project from moving to the funding stage.
Although many respondents in both groups identified developer opposition as
an obstacle, one respondent commented that most developers in California are
INCENTIVES 15 MOST PRODUCTIVE OTHER
PROGRAMS PROGRAMS
Density bonus 93% 92%
Fast-track processing 47% 44%
Standards reduction 33% 42%
Growth control exemption 7% 13%
Tax abatement 0% 4%
Fee waiver 20% 42%
Fee deferral 53% 19%
Fee reduction 20% 35%
Other 29% 32%
Subsidies for IZ units 71% 38%
INCENTIVES OFFERED TO PRODUCE AFFORDABLE HOUSING
Sect.4.qx 6/30/03 1:02 PM Page 24
25Inclusionary Housing in California: 30 Years of Innovation
"resigned" to inclusionary policies, given the number of jurisdictions in the state
that have such requirements. Another respondent observed that market-rate
housing developers may not like inclusionary programs, but choose to produce
affordable units rather than stop developing altogether.
What other factors tend to increase the number of units produced?
The most productive programs were adopted earlier, but amended more
recently, than the others. It is not surprising that the jurisdictions that have had a
sustained commitment and continued to fine-tune and update their programs,
would be the ones that have achieved the most production of affordable units.
C. POLICY R ECOMMENDATIONS FOR
L OCAL G OVERNMENTS
There is a great deal of variation in the success of local inclusionary programs,
as judged from the production of affordable units. The following policy recommen-
dations for local governments are drawn largely from the characteristics of those
programs that have produced the most affordable units since their inception.
Since the most productive programs are often older, the recommendations
below also include successful elements of newer programs, as well as program
elements contained in recently updated inclusionary policies. While each jurisdic-
tion has unique circumstances and needs, cities and counties developing a new
inclusionary program (or revising an existing program) can learn from what is
working well elsewhere.
OBSTACLES TO 15 MOST PRODUCTIVE OTHER
IMPLEMENTING POLICY PROGRAMS PROGRAMS
Community opposition 8% 22%
Developer opposition 42% 38%
Local government processes 0% 5%
Lack of funding 67% 24%
Scarcity of land 33% 64%
Other 33% 27%
OBSTACLES TO SUCCESS OF INCLUSIONARY PROGRAMS
AGE AND 15 MOST PRODUCTIVE OTHER
AMENDMENTS PROGRAMS PROGRAMS
Median year of adoption 1990 1993
Amended 47% 43%
Median year of amendment 2002 2000
YEAR OF ADOPTION AND AMENDMENT OF INCLUSIONARY PROGRAMS
Sect.4.qx 6/30/03 1:02 PM Page 25
26 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
INCLUSIONARY PERCENTAGE
Aim high in the percentage of units required to be affordable; 15 percent is
realistic in most communities. If developers express concerns, design incentives
and program flexibility to mitigate the burden they face in meeting inclusionary
requirements, as described below.
INCOME-TARGETING
Unless financially infeasible, require housing for very low-income, low-income,
and moderate-income households to be included. Very low-income units are usually
feasible only in rental housing. Section 8 vouchers can provide deeper affordability.
Income categories can and should be adjusted based on local needs; for
example, programs can target moderate-income units to a maximum of 100 percent
of median, instead of 120 percent. The relative need of income groups as identified
in the locality’s Housing Element should guide inclusionary program design, with
the inclusionary housing complementing other housing programs, such as new
construction of assisted housing.
RENTAL AND OWNERSHIP
Adopt inclusionary requirements for rental and for-sale housing that are
similar enough so that developers continue to provide an appropriate mix of both
housing types. Creating too great a difference between the targeting of inclusionary
rental units versus for-sale units could create an unintended financial incentive for
developers to produce only for-sale housing.
DEVELOPMENT-SIZE THRESHOLD
Subject residential development of any size to inclusionary requirements, with
payment of in-lieu fees allowable for any fractional units required. Alternatively,
provide a complete exemption for only the smallest developments, such as those
below five units.
Dove Family Housing–plans for
inclusionary affordable housing on the
La Costa development in
Carlsbad (San Diego County).
(Photo credit: Mercy Housing
California)
Sect.4.qx 6/30/03 1:02 PM Page 26
27Inclusionary Housing in California: 30 Years of Innovation
ALTERNATIVES TO CONSTRUCTION ON-SITE
Offer some flexibility to developers, such as in-lieu fees, land dedication, or
off-site development, but subject to local government determination that the
alternative meets the need for affordable housing at least as well as traditional
on-site inclusionary units.
Where in-lieu fees are an option, set the fee level as high as the cost to the
locality of making the units affordable without other public subsidy. In other words,
the developer’s decision to build units or pay fees should be revenue-neutral, and
the locality collecting the fees should be able to fund as many units as would have
been required of the developer. In-lieu fee levels should be tied to the cost of
construction, and adjusted regularly.
Allow in-lieu fees at the discretion of local government or in specific
circumstances, such as when fractional units are required, or when the developer
can prove that providing affordable units on-site is financially infeasible.
DEVELOPER INCENTIVES
Provide incentives that local developers want and can use. Consult with
developers during program design to find out how to structure density bonuses,
reduced parking requirements, expedited permit review, design differences, growth
control exemptions, etc., so that they are meaningful incentives.
LENGTH OF AFFORDABILITY
Require units to be kept affordable permanently, or for at least 55 years for
rental and for-sale homes. For home ownership units, programs need carefully con-
structed adjustments to provide reasonable amounts of equity to accrue to owners.
Design effective mechanisms to track long-term affordability, such as
restrictions recorded against the property.
D. FUTURE R ESEARCH
While this report provides a useful snapshot of inclusionary housing programs
in California, more research in this area is clearly needed. The most obvious but
difficult to ascertain information would be an analysis of the cost impacts of inclu-
sionary programs on market-rate units. There is a great deal of theoretical writing
on the topic, but the authors did not find an empirical study on the subject. Given
the difficulty of determining the economic impact of inclusionary programs, another
potential area of research would be to compare housing production of communities
within the same region, those with inclusionary and those without.
There is also great need for more in-depth field research on specific programs
to analyze the effectiveness of particular program features, such as credit transfers.
More work on the relative effectiveness of various monitoring and affordability
restrictions is needed for both rental and for-sale homes. For ownership housing in
particular, research and case studies are needed to better understand the long-term
affordability of inclusionary homes and the loss of units with no or limited deed
restrictions. Similar research is needed to better understand how land dedication
and local public subsidies, both direct outlays and fee concessions, are working to
facilitate the creation of inclusionary units.
Undoubtedly, further research will provide more detailed information about
these key elements of inclusionary housing programs. In the meantime, this report
Sect.4.qx 6/30/03 1:02 PM Page 27
is intended as a starting point for advocates and local government officials.
What we know today is that the effectiveness of inclusionary housing programs in a
few cities and counties illustrates the potential for all jurisdictions. At the same
time, the report offers proponents of inclusionary zoning a road map for avoiding
problems that others have discovered over time. With so many Californians still
struggling with unmet housing needs, it is crucial that this report and future work
help create a greater shared understanding of how inclusionary housing can be a
major piece of solving the affordable housing crisis in California and nationwide.
28 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Petaluma Ecumenical Properties
developed these 40 rental apartments in
Petaluma (Sonoma County) with funding
from the City’s in-lieu fees to help target
families earning 30 to 50 percent of area
median incomes.
(Photo credit: Petaluma Ecumenical
Properties)
Sect.4.qx 6/30/03 1:02 PM Page 28
29Inclusionary Housing in California: 30 Years of Innovation
E
ND
N
O
T
E
S
1 The California Budget Project, Locked Out 2002: California’s Affordable
Housing Crisis Continues (Sacramento: October 2002), p. 10.
2 Department of Housing and Community Development, Raising the Roof–
California Housing Development Projections and Constraints 1997-2020,
Statewide Housing Plan (Sacramento: May 2000).
3 The California Budget Project, Locked Out 2002,p. 9.
4 This list of 107 inclusionary jurisdictions includes cities and counties
implementing inclusionary programs through an ordinance, General Plan policy,
or permit approval process.
5 California Community Redevelopment Law: Article 9, Section 33413.
<<www.redevelopmentlaw.com>>
6 California Coastal Act: Chapter 7, Article 1. <<http://www.coastal.ca.gov>>
7 Some of the jurisdictions currently considering inclusionary policies or
ordinances include: Albany, Hayward, Los Angeles, Milpitas, Oakland and Placer
County.
8 Judd, Rick, Seifel, Libby, and Shoemaker, Doug, "Creating Mixed-Income
Communities: Inclusionary Housing" in book to be published by Solano Press
Books, Point Arena, California.
9 Southern Burlington NAACP et al v. Township of Laurel, 67 N.J. 151 (1975).
10 Calavita, Nico and Grimes, Kenneth. "Inclusionary Zoning in California: The
Experience of Two Decades," Journal of the American Planning Association,
American Planning Association, Vol. 64, No. 2, Spring 1998, Chicago, Illinois;
p. 152.
11 Johnston, Robert & Schwartz, Seymour. Local Government Initiative for
Affordable Housing: An Evaluation of Inclusionary Housing Programs in
California.Davis: Kellogg Public Service Research Program, December 1981.
12 Zatz, Shoshana. Creating Affordable Communities: Inclusionary Housing
Programs in California.Sacramento: California Coalition for Rural Housing,
November 1994.
13 Calavita and Grimes, p. 157-8.
14 Various jurisdictions listed on the California Planners Information Network
(www.calpin.ca.gov)self-report having some kind of inclusionary housing.
Our research confirmed that many of these jurisdictions only have formal
inclusionary programs as required or governed by State Redevelopment Law or
the Coastal Act.
15 Jurisdictions enforcing inclusionary requirements as part of Redevelopment
Agency practices or State Density Bonus Law, but with no local policy, were not
included.
16 It seems likely that more jurisdictions with inclusionary ordinances also have
policies in their General Plans since local laws are required to be consistent
with General Plans.
Endnote.qx 7/1/03 4:47 PM Page 29
30
17 Appendix A provides detail on those variations, but for the purposes of the
charts comparing inclusionary practices in California, the authors have
classified those policies in terms of the minimum percentage required for a
project.
18 Figure 4 on page 10 and Appendix A provide detail on those variations, but for
the income-targeting charts in this section, the authors have classified multiple-
choice policies in terms of the highest income target allowed at the developer’s
discretion.
19 Calavita and Grimes, p. 160-5.
20 Calavita and Grimes, p. 155.
21 Several factors determine the relative "strength" of an inclusionary policy.
A multivariate statistical analysis to correlate overall housing production with
the relative strength of a locality’s inclusionary program, controlling for other
factors, would not be possible based on the data collected. However, we have
made simple correlations that may explain, at least in part, the success
experienced by the top 15 programs in terms of annual production relative to
the other 92 programs, and dispel some of the negatives associated with
different inclusionary program features. These jurisdictions produce at least
35 affordable units per year.
California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Endnote.qx 7/1/03 4:47 PM Page 30
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Sa
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1
9
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L
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1
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/
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Ch
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V
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Sa
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1
9
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1
7
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55
t
o
P
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Cl
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Co
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9
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L
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8
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N
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A
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1
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5
M
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7
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Co
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Sa
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1
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Co
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Co
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Cu
p
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Sa
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1
9
8
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/
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1
5
V
L
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6
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9
9
Da
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1
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Da
v
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l
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9
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o
N
/
A
1
0
1
0
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I
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L
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N
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A
3
0
31Inclusionary Housing in California: 30 Years of Innovation
A
PP
E
N
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A
Ju
r
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P
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3
1
32 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
Ju
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1
9
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3
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1
9
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1
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9
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1
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L
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Ma
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5
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l
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1
9
8
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4
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P
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P
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3
2
33Inclusionary Housing in California: 30 Years of Innovation
Ju
r
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t
i
o
n
C
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t
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Pa
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Sa
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L
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4
30
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P
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L
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P
Pe
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So
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1
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1
4
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P
Pi
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2
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M
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/
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3
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Pl
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V
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P
Pl
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P
Po
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Ve
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r
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34 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
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35Inclusionary Housing in California: 30 Years of Innovation
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36 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
A
PP
E
N
D
I
X
B
S URVEY I NSTRUMENT
AppendixB&C.qx 6/30/03 10:01 AM Page 36
37Inclusionary Housing in California: 30 Years of Innovation
AppendixB&C.qx 6/30/03 10:01 AM Page 37
38 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
AppendixB&C.qx 6/30/03 10:01 AM Page 38
39Inclusionary Housing in California: 30 Years of Innovation
AppendixB&C.qx 6/30/03 10:01 AM Page 39
40 California Coalition for Rural Housing • Non-Profit Housing Association of Northern California
A
PP
E
N
D
I
X
C
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Zatz, Shoshana, Creating Affordable Communities: Inclusionary Housing Programs in California.
Sacramento: California Coalition for Rural Housing, November 1994.
W EBSITES WITH A DDITIONAL T OOLS OR R ESOURCES
Policy Link: http://www.policylink.org/EquitableDevelopment/
Innovative Housing Institute: http://www.inhousing.org/
Massachusetts Housing Partnership Fund:
http://www.mhp.net/termsheets/inclusionaryzoning.pdf
AppendixB&C.qx 6/30/03 10:01 AM Page 40
Inclusionary Housing in California: 30 Years of Innovation
Inclusionary Housing in California: 30 Years of Innovation was researched and written
collaboratively by staff from the California Coalition for Rural Housing (CCRH) and the Non-Profit
Housing Association of Northern California (NPH).
CCRH and NPH would like to offer special thanks to:
All of the public agency staff who took time out of their hectic schedules to complete
our survey.
Bill Higgins of the Institute for Local Self-Government and Chris McKenzie of the
California League of Cities for their assistance in encouraging local governments to respond
to the surveys.
Deborah Collins and Sima Alizadeh of the California Affordable Housing Law Project for
collaborating on early research.
Rick Judd of Goldfarb and Lipman, and David Stoloff for assistance in reviewing drafts of
the report.
The Sustainable Communities Leadership Program of the Environmental Careers
Organization for providing funding for the initial research.
CCRH would like to thank:
Sociological Initiatives Foundation
Designed by Janet Fong Design
A
CK
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O
W
L
E
D
G
E
M
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S
The California Coalition for Rural Housing
(CCRH) is a statewide network of non-profit
housing developers, legal service providers, and
public housing agencies who support the
production of decent, safe, and low-cost housing
for rural and low-income Californians. CCRH
advocates at all levels of government and
provides technical assistance to community
groups and non-profits on housing issues.
CCRH Staff
Robert Wiener,
Executive Director
Andy Potter,
Program Specialist
The Non-Profit Housing Association of
Northern California (NPH) works to advance
affordable housing as the foundation for thriving
individuals, families and neighborhoods. As the
collective voice of those who finance, build,
operate and support affordable housing, NPH
promotes the proven methods offered by the
non-profit housing sector and focuses
government policy on housing solutions.
NPH Staff
Dianne J. Spaulding,
Executive Director
Doug Shoemaker,
Policy and Program Director
Tina Duong,
Communications and
Resource Development Director
Shannon Dodge,
Fair Share Housing Campaign
Regional Coordinator
Amy Cardace,
Sustainable Communities
Leadership Program Fellow
cover.qx 6/30/03 4:44 PM Page 4
CALIFORNIA COALITION FOR RURAL HOUSING
926 J Street, Suite 1400
Sacramento, CA 95814
tel: (916) 443-4448
fax: (916) 447-0458
www.calruralhousing.org
NON-PROFIT HOUSING ASSOCIATION OF NORTHERN CALIFORNIA
369 Pine Street, Suite 350
San Francisco, CA 94104
tel: (415) 989-8160
fax: (415) 989-8166
www.nonprofithousing.org
Santa Alicia Apartments, home to
84 very low- and low-income families in
Irvine (Orange County), was developed by
BRIDGE Housing Corporation
Photo credit: BRIDGE Housing Corporation
cover.qx 6/30/03 10:00 AM Page 1
http://peeg.wordpress.com
Papers in Evolutionary Economic Geography
# 19.14
Housing, urban growth and inequalities:
The limits to deregulation and upzoning in reducing economic and spatial
inequality
Andrés Rodríguez-Pose & Michael Storper
1
Housing, urban growth and inequalities:
The limits to deregulation and upzoning in reducing
economic and spatial inequality
Andrés Rodríguez-Pose1 and Michael Storper2
Abstract: Urban economics and branches of mainstream economics – what we call the
“housing as opportunity” school of thought – have been arguing that shortages of affordable
housing in dense agglomerations represent a fundamental barrier for economic development.
Housing shortages are considered to limit migration into thriving cities, curtailing their
expansion potential, generating rising social and spatial inequalities, and inhibiting national
growth. According to this dominant view within economics, relaxing zoning and other
planning regulations in the most prosperous cities is crucial to unleash the economic
potential of cities and nations and to facilitate within-country migration. In this article, we
contend that the bulk of the claims of the housing as opportunity approach are
fundamentally flawed and lead to simplistic and misguided policy recommendations. We
posit that there is no clear and uncontroversial evidence that housing regulation is a
principal source of differences in home availability or prices across cities. Blanket changes in
zoning are unlikely to increase domestic migration or to increase affordability for lower-
income households in prosperous regions. They would, however, increase gentrification
within prosperous regions and would not appreciably decrease income inequality. In contrast
to the housing models, we argue the basic motors of all these features of the economy are the
current geography of employment, wages and skills.
Keywords: Cities, housing, regulation, urban planning, economic growth, inequality,
migration.
JEL Codes: D63, O18, R21, R23, R31.
________________________________
1 Department of Geography and Environment, London School of Economics. E-mail:
a.rodriguez-pose@lse.ac.uk.
2 Department of Geography and Environment, London School of Economics; Luskin School
of Public Affairs, UCLA; Centre de Sociologie des Organisations, SciencesPo Paris. E-mail:
m.storper@lse.ac.uk.
2
“(2) Economists widely agree that restrictive land use policies increase housing prices. Studies
have found that housing prices in California are higher and increase faster in jurisdictions with
stricter land use controls, and in some markets, each additional regulatory measure increases
housing prices by nearly 5 percent. Stricter land use controls are also associated with greater
displacement and segregation along both income and racial lines. Restrictive land use policies
also hurt economic growth by preventing residents from moving to more productive areas where
they can accept more productive jobs that pay higher wages.” California Senate Bill 4
(McGuire and Beall), 10/4/2019.
Introduction: housing is no longer a local issue
Housing market failures can imperil local economic growth and generate problems such
as segregation, long commute times, deteriorating quality of life, homelessness, and barriers
to social mobility for certain populations. In recent years, these worries have tended to
increase in the metropolitan areas of many countries. In developed countries, housing
regulation through planning and zoning has long been considered to be primarily a domain of
local policy, with national policy in a supporting and guiding role for cities and regions. This
notion is now changing because, in the mainstream view, sharply rising housing prices and
declining affordability in metropolitan are the result of overly-restrictive zoning and onerous
regulation of construction. These restrictive local housing policies are increasingly seen as
central to the magnification of social and spatial inequalities at national scale. This connection
emerges, it is argued, because local housing policies create barriers to the ability of people
from less dynamic regions to move to more dynamic ones. Housing, in this view, is no longer
a local issue: it is central to debates about national growth, the effects of globalization on
communities, and can become a source of populist anger from those who are locked out of
prosperous metropolitan regions.
In this paper, while agreeing that housing policy can have important impacts on
economic growth and social equity, we will critique this mainstream academic view of
precisely how housing fits into the broader picture of economic growth and inequalities in the
age of globalization. Specifically, we suggest that housing supply is more important, by city
scale (among neighbourhoods), than it is to shaping inter-regional migration, the size of cities,
3
and the performance of national economies. The barriers to migration to prosperous economic
areas consist less of housing, and much more of the skill composition of urban labour
demand. The affordability crisis within major urban areas is real, but it is due less to over-
regulation of housing markets than to the underlying wage and income inequalities, and a
sharp increase in the value of central locations within metro areas, as employment and
amenities concentrate in these places. We posit that this school of thought is simultaneously
diverting attention from the real problems of other, lagging regions, while overestimating the
potential demographic, income distribution and productivity effects of less restrictive zoning
on prosperous regions.
The “housing-as-opportunity” view of inter-regional inequality
Since the beginning of the current round of globalization in the 1970s, we have
witnessed a tendency for two types of inequality – interpersonal and geographical – to rise.
Income inequality within countries has intensified, both in the developed and developing
world (Milanovic, 2016). But while interpersonal inequalities have continued to attract the
most attention (e.g. Piketty, 2014), the parallel rise of inter-regional inequality has remained
somewhat under the radar. Yet, it is becoming increasingly clear that regional inequalities
have also turned a corner. In the US, the inequality of income per person among metropolitan
areas was 30% higher in 2016 than it was in 1980 (Ganong and Shoag, 2017). In Europe and
in a process driven by fast-growing capital regions, a long period of regional convergence
dating back to 1900 has been replaced since 1980 by divergence (Rosés and Wolf, 2018).
A number of recent changes seem to be behind the widening of inter-territorial
inequality. First, inter-regional migration is declining: in the United States it has fallen to half
of its century-long average up to 1980, and it is more spatially selective by skill level
(Giannone, 2017). Second, labour force participation rates also have a higher inter-regional
4
variance in the EU and the USA than since the 1930s Great Depression. Moreover, the jobs
generated in lagging-behind and declining areas have lower average skill levels and wages
than those created in more prosperous metropolitan areas (Di Cataldo and Rodríguez-Pose,
2017). Generally, the employment that relocates from core areas to other regions is in more
routine, with lower wage levels (Autor and Dorn, 2013). Technology (automation) is
suppressing employment levels in routine activities, and import competition keeps unskilled
wages down (Autor, Dorn and Hanson, 2015). Though there are some bright signs in lagging-
behind regions, such as the expansion of warehousing and logistics jobs linked to the internet
economy, wage and skill levels are stagnating and employment levels will be challenged by
robotization. Overall, the divergent new geography of income and jobs is also becoming a
divergent new geography of opportunities (Storper, 2018).
What can be done to reverse the increasing polarization of income, jobs, and
opportunity? Although multiple solutions have been proposed since the 1950s, as The
Economist (2016) put it, “orthodox economics has few answers to the problem of regional
inequality.” In recent years, however, one position deeply embedded in urban economics has
also become dominant: the only place-based policy that stands a chance of making a
difference involves lifting the barriers to migration from lagging regions to leading
metropolitan areas, as the way out of the current predicament of divergence and inequality.
The barrier that must be lifted in order to make this happen is, according to this view,
insufficient housing construction in prosperous areas due to local restrictive zoning in those
regions. The places where policy is needed are therefore not the lagging and falling-behind
regions, but the prosperous areas, which are perceived as afflicted by the disease of NIMBY-
ism (Not-In-My-Back-Yard). Undoing NIMBY-ism would allow people from other regions,
whom are deemed to be excluded by high housing prices and low availability in prosperous
places, to move to prosperity (thus, a place-based policy leads to a people-based outcome).
Along these lines, a host of academic papers (e.g. Katz and Rosen, 1987; Quigley and
5
Raphael, 2005; Ihlanfeldt, 2007; Glaeser and Gottlieb, 2008; Saiz, 2010; Kline and Moretti,
2014; Hsieh and Moretti, 2015, 2017; Ganong and Shoag, 2017: Gaubert, 2018) has made a
set of inter-linked claims:
1. Restrictive zoning and other regulations in prosperous metropolitan regions limit
the expansion of housing supply;
2. Such constraints drive housing prices up;
3. It adds to the income of developers and landowners and transfers income away
from workers living in or seeking to live in these regions (whether as buyers or
renters) and, in doing so, enhances inter-personal income inequality;
4. Housing restrictions dampen migration into prosperous regions, depressing access
to metropolitan labour markets, especially for the unskilled in declining regions;
5. Fewer restrictions on housing supply in prosperous regions would alter the inter-
regional spatial distribution of population of all skill levels and prosperous
metropolitan areas will become bigger, more productive, and more socially
inclusive. Moreover, the inter-personal income distribution – at a national scale
and especially within prosperous regions – would become more equal.
6. By inference, despair and unemployment in lagging regions would decline and
per capita incomes increase due to higher rates of out-migration from these areas
to prosperous ones.
7. Housing deregulation in prosperous regions would, thus, have a trickle-down
effect. Expanding housing supply in desirable locations would reduce housing
market competition and generate affordability and upgrading for wide swathes of
the population, stretching far down the income distribution.
Taken together, these claims amount to an extremely ambitious and comprehensive
vision of how the space-economy works to link the local and the far away. They form the
6
basis of what has increasingly become a mainstream policy consensus that centres on
reducing housing restrictiveness in prosperous areas, asserting that massively increasing the
land zoned for housing and its permissible densities is a meaningful instrument to confront
and change the current inter-regional divergence of incomes, employment and opportunity, to
reduce income inequality, and increase housing access for low-income people in prosperous
metropolitan regions.
We call this perspective the “housing as opportunity” policy school of thought.” This
perspective has come to dominate academia and captured the public imagination, as its
authors have attracted great attention with their claims about the benefits of housing
deregulation to prosperous and less prosperous areas alike and to the national economy as a
whole. Hsieh and Moretti (2017), in estimations we shall criticize below, assert that the US
economy would be far bigger if housing were unregulated, and that the larger agglomerations
would increase in size, as the less skilled currently languishing in stagnating regions would
migrate to them. Hence, inter-personal inequality would decline, in a win-win scenario of
rising productivity and prosperity for all. Ganong and Shoag (2017) claim that inter-state
income convergence would be at least 10% greater since 1980, were it not for restrictive
housing regulations in prosperous areas. Glaeser (2017) endorses their claims that “America’s
most important, hence costly regulations, are land use controls”, and both the New York
Times editorial board and its progressive columnists, such as Paul Krugman, have backed the
view that NIMBYism, in the form of neighbourhood housing regulations, is strangling
national economic growth and has made prosperous metro areas like citadels that those with
less education can no longer get into.1
1 The mainstream view has strongly influenced legislators, and policy think tanks. For example, the Obama
Administration, through its Housing Development Toolkit, and most recently, Senator Elizabeth Warren
(American Housing and Economic Mobility Act, proposed legislation), as well as the Trump administration’s
Spring 2018 Housing and Urban Development Department publication (Evidence Matters) and Secretary Ben
Carson’s August 14, 2018 tweet encouraging cities to loosen zoning on behalf of affordable housing. In
California the issue of housing development has taken centre stage, with more than 200 Senate Bills – with SB4
and SB 50 being the most relevant – introduced this session (Koseff, 2019). This follows bills 35, 167 and 827
7
And this is not without consequences. As indicated by Romen (2016: 1) “cities
confronting growth pressure face a trade-off between accommodating growth through
outward expansion, or accepting the social implications of failing to build enough new
housing”. Thus, local housing and zoning regulations have become not just a local, but a
national planning issue, and not just in the United States. They have long been the concern of
a national policy debate in the UK. Interestingly, the academic consensus unites groups that
emphasize the supposed social justice aspects of reducing housing regulation, assuming it
would help the less skilled and reverse a long association of zoning with racial exclusion, with
mainstream economists, who assume that regulation is inefficient. As can be imagined, both
are applauded by land developers, who are strong supporters of the California-based YIMBY
(Yes-in-My-Backyard) movement.2
A corollary to their emphasis on housing in prosperous regions is a systematic
rejection of place-based policies in less prosperous regions.3 In their view, large and densely
populated cities are the only possible motors of economic activity and promoting economic
activity in less-developed areas through public intervention leads, at best, to market
distortions and, at worst, to a waste of public resources on “troubled areas” (Glaeser and
Gottlieb, 2009: 1014). Moreover, because promoting development in lagging areas implies
“severe equity efficiency trade-offs” (Kline and Moretti, 2014: 656), “subsidizing poor or
unproductive places is an imperfect way of transferring resources to poor people” (Kline and
Moretti, 2014: 656).
In their thinking, the alternative – ‘place-based policies’ for lagging-behind areas – is a
suboptimal solution, unlikely to have any discernible economic impact (Leunig and Swaffield,
passed in the 2017-18 session.
2 A principal backer of SB 827 and SB 50 (Bronstein, 2018).
3 Although the tide seems to be turning and some mainstream economists in the current political climate seem to be
reluctantly endorsing place-based policies for areas with historically high unemployment (e.g. Austin Glaeser and
Summers, 2018).
8
2007; Glaeser and Gottlieb, 2008). “Local economic policies that are meant to increase
production in a particular area […] seem to be either extremely expensive or ineffective”
(Glaeser and Gottlieb, 2008: 203). Moreover, the “mobility of people and capital can
complicate the effects and potentially undo most or all of the gains from such redistributive
policies” (Neumark and Simpson, 2014: 12).
Our purpose in this paper is to scrutinize this mainstream view about housing
construction in prosperous areas as a route to greater prosperity and equality in the winner
regions. Our point of departure is that housing markets are not like standard markets, so that
aggregate increases in supply do not translate in any straightforward way to decreases in
price, because the internal plumbing of housing markets – succession, migration, and
occupation patterns – are full of frictions, sunk costs, barriers and externalities that make the
effects of aggregate supply increases highly uneven, and in many cases involve unintended or
contradictory effects. From this point of departure, our critique argues that the first three
claims of the mainstream view above are reasonable but require considerable nuance, while
the remaining four are implausible. Through our critique of these claims, we conclude that the
housing as opportunity school is diverting attention away from the tasks necessary to address
the problems of lagging regions and inter- regional inequality. It also exaggerates the effect of
housing in contributing to the overall rise of inter-personal inequality and socio-spatial
segregation. Finally, by implication it diverts attention away from the real need to address
housing affordability for low- and moderate-income groups already residing in the prosperous
metropolitan regions.
Does economic growth come mostly from city size, or from urban specialization?
The housing as opportunity school sees housing as the key element in determining
inter-regional population mobility and the geographical pattern of real incomes. City size and
9
density are crucial for economic growth. The corollary assumption is that restricting
immigration will limit productivity growth, by preventing the unskilled from matching to
better job opportunities that supposedly exist for them in prosperous city-regions. The basic
set-up here derives from spatial equilibrium theory, which holds that city size and population
growth are the only important factors for economic growth, because once the conditions are in
place for population growth, jobs and output growth will follow (Glaeser, 2008). This model
explicitly rejects using income, per capita income, or the wage structure as measures of urban
performance. Therefore, we need to scrutinize the relationship between housing and land
supply and urban population growth.
However, the connection between city size, urban population growth and economic
growth is far from straightforward (e.g. Polèse, 2005; Frick and Rodríguez-Pose, 2018). Even
in the case of the US, the country that has traditionally been used to prove this connection,
over the last decade and a half economic polarization has coincided with an absence of a close
link between city size and economic growth. Figure 1 displays the link between the size of US
metropolitan statistical areas (MSAs) and their economic performance per capita between
2001 and 2016. Taken as a whole, the relationship is, at best, tenuous. While some large
MSAs, such as Portland, Los Angeles, San Francisco, Boston, or Seattle have done well,
economic growth per capita in other large agglomerations during the same period, including
Atlanta, Phoenix, and Las Vegas, has been negative. The link between initial city population
and economic growth during the same period is non-existent (Figure 1).
10
Figure 1. Relationship between city size and per capita economic growth in the
US, 2001- 2016.
The same applies to population growth. Although it is true that cities with more
unregulated housing markets have witnessed greater population growth, population growth
has not necessarily been translated into economic growth (Figure 2). Some cities with
relatively unregulated housing markets, such as San Antonio, Dallas-Fort Worth, and
Houston, have both experienced high levels of population and economic growth. However,
rapid population expansion has not resulted in economic growth in Las Vegas, Orlando,
Phoenix, or Atlanta. In contrast, many cities with highly regulated housing markets, such as
New York, Boston, Portland, and San Francisco, have enjoyed high absolute levels of
economic and population growth in the past few decades (with the exception of Portland’s
population growth). Overall, since the turn of the century there has been no connection
between population change and economic growth across US cities (Figure 2).
-4
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GDP per capita growth 2001-2016 95% CI
Fitted values
Circle size determined by population in 2000
GDP per capita growth 2000-2016 vs. population in 2000
11
Figure 2. Link between population growth and the growth of GDP per capita in US MSAs,
2000-2016.
For present purposes, this means that, even if substantial deregulation of housing
markets were to reshape migration and population distribution, more national economic
growth would not necessarily follow automatically. This is because urban productivity and
incomes appear to rise up to a certain point, but are also shaped by what a city specializes in
and from the absolute size of a particular specialized agglomeration of firms (Kemeny and
Storper, 2014). Thus, the US has a bigger urban productivity surplus than does Europe, and
Europe has many more middle-sized cities than the USA, but this difference is less due to the
preponderance of larger urban areas in the USA and more to their greater specialization,
which is an outcome of the lower barriers to trade within the US urban system. Not enough is
currently known about the relative contributions of size and specialization to incomes and
productivity, but is a leap into the unknown to predict unlimited positive relationships of the
-4
.
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Annual population change, 2000-2016 (%)
GDP per capita growth 2001-2016 95% CI
Fitted values
Circle size determined by population in 2000
GDP growth vs. Population change, 2000-2016
12
latter to metropolitan size.
Is inter-regional migration shaped principally by housing prices?
Mainstream theories have used the association between low levels of housing
regulation and high rates of population growth in the Southeast and Southwest of the USA as
an explanation for their population growth (Graves, 1976; Roback, 1982; Glaeser, 2008).
Most such models assume that housing and amenities rank highly on preference functions, via
a further assumption that “jobs follow people” (Muth, 1971). Their canonical image is taken
from US Sunbelt development in the post-war period, which involved high domestic
migration (rural to urban within the South; and Industrial Midwest/Northeast to South and
West). But the assumption that these migration streams were motivated by cheaper housing in
the developing areas finds no historical proof at all in that literature.
A more plausible explanation is that such migration was unleashed by de-
agglomeration of routine manufacturing from its Northeastern-Midwestern heartland,
combined with job-market deregulation in the form of the Taft-Hartley Amendments to the
National Labour Relations Act in the 1940s, which made it more difficult to unionize in the
resulting “right-to-work” states. This prolonged the cheapness of labour in during the rural-to-
urban transition in the post-war period. Hence, an explanation of the growth of these regions
starts with the movement of jobs, fuelled by a deregulated labour market, rather than with
unregulated housing markets. Massive migration to California, by contrast, clearly did not
have to do with cheap housing, as Californian metropolitan housing prices have remained well
above national averages for the better part of a century.
Deepening a perspective based on employment as the key direct factor behind urban
growth and decline, from the late 1950s and through the 1970s cities in the Northeast and
Midwest bled jobs, as manufacturing went through a three-phased process of de-
13
agglomeration to the South, technological change, and, finally, globalization. This is what is
vernacularly known as “the new geography of jobs” and the “great inversion” (Moretti, 2012).
It was not highly-regulated housing markets that led to population loss in these cities and
regions, but employment decline. Later, with the advent of the new economy, selective parts
of the old economy, such as Boston, Washington, New York, (or London in Europe),
reinvented themselves and rebounded from population decline, again in spite of highly-
regulated housing markets.
The difference between the two cases of population change is the type of jobs and the
point in industrial maturity that generated them (Norton and Rees, 1979). In the rapidly-
growing cities of the American Sunbelt, average skill and wage levels have for decades been
lower than in cities such as Washington, Seattle, and San Francisco. One of the major
contributors to the rising gap in housing prices between high-cost regions, such as New York
and San Francisco, and low-cost regions, such as Orlando or Phoenix, is the widening
differences in wages and wealth of those who seek housing in the two different types of
region (Romen, 2018). Hence, differences in housing prices are not uniquely determined by
the level of in-migration (aggregate demand) but its composition. “Composition” here refers
to the wage and income structure of the population. In areas that have grown principally due
to the growth of jobs with routine skills and moderate wages, housing prices are mechanically
lower than in metropolitan areas that draw in the highly-skilled and highly-paid. A different
case is weak aggregate demand, explaining why housing is also inexpensive in most middle-
sized cities of the Rustbelt – Buffalo, Milwaukee, South Bend, Syracuse, where people leave
in spite of low housing costs. Lack of jobs and a weak geography of opportunity are the main
culprit. In many growing Sunbelt cities, by contrast, employment growth has taken place
mainly in middle- to low-waged jobs. This trend is so strong that, as Autor and Fournier
(2019) put it, “the economic advantages of dense cities are disappearing for low-skilled
workers.” In 1950, denser urban areas offered higher wages for both educated and less
14
educated workers. Today, when wages are adjusted for density, workers without a college
degree have very little advantage from locating in large cities. Similar trends are being
uncovered in Europe. Bjerke and Mellander (2019) find that moving from a rural to an urban
area in Sweden has no positive effects on the movers’ salaries, with the only exception of the
highly-skilled. Though housing costs in dense areas compound the disadvantage to low-
skilled workers, reducing housing costs would not, under any scenario, erase the basic facts of
the labour market in dense urban areas for these workers, which stem from fundamental
changes in economic geography, as we shall argue in more detail later in the paper.
A more recent generation of models that comprises part of the housing literature does
centre on the geography of employment. Gaubert (2018) argues that firm sorting and housing
are strongly tied. In her model, cities are undersized today because firms cannot capture all
the potential gains to workers’ productivity from potential agglomeration economies, and this
is because wages in large cities are inflated by excessive housing costs due to regulation.
Thus, if housing supply increased, this would flatten the inter-regional wage curve, attracting
more firms into big cities and, consequently, endogenously creating more agglomeration
externalities. The key mechanism would be increasing the skilled labour supply, resulting in
bigger and more productive and specialized cities. This model affirms our view that urban
growth – whether induced by greater housing supply or other factors – would primarily
involve the skilled workers as currently enjoying high urban wage premiums (Autor and
Fournier, 2019; Bjerke and Mellander, 2019). Figure 3 buttresses our view that it is the
fundamentals of economic geography more than house prices that are at work, by showing
graphically the weak relationship between changes in home values, expansion of the
developed residential area, and the presence of immigrants in US cities.
15
Figure 3. Urban land area development, house prices and in-migration in the largest
metropolitan areas in the US (1990-2017).
Source: Own elaboration, using data provided by Romen, Bogin, Doener and Larson (2018) and the Migration
Policy Institute (2018).
The relationship between residential expansion and low housing value appreciation
emphasised in the housing as opportunity literature appears only in a relatively small number
of Southern cities, highlighted by a black square. In Charlotte, Raleigh, Nashville, Atlanta,
Jacksonville, Las Vegas or Orlando, a rapid increase in the developed land area between 1990
and 2010 has indeed come with moderate increases in house prices. But affordable housing
has hardly been a magnet for immigrants, as the number of immigrants from outside the US in
these cities is relatively low in comparison to the rest of urban America. On the whole, these
cities tend to be outliers, rather than the norm.
The norm, in fact, does not exist. This reflects that there is much more than housing
16
regulation driving the relationship between housing expansion, affordability, mobility and
urban growth. A number of cities that have witnessed limited land area development and high
house price increases over the last decades, either because of strong geographical constraints
or tight regulations (those denoted by a red star in Figure 3), have continued to attract
population and large numbers of immigrants. Miami, with almost 40% of foreign population,
tops the rank of metropolitan areas with more foreign immigrants. Los Angeles comes second;
San Francisco, fifth; San Diego and New York are not far behind. Another group of US cities
– such as Indianapolis, Cincinnati Greensboro, Columbus, Louisville and Kansas City,
indicated by a green diamond in Figure 3 – have experienced rapid housing growth and, while
prices have remained relatively low, they have failed to attract immigrants. In other expansive
cities, such as Austin, Phoenix, Salt Lake City, Denver, Dallas, San Antonio or Tampa
(denoted by a yellow pentagon), rapid housing growth has not been accompanied by greater
affordability. Here, while the share of immigrants is greater than in areas with more affordable
housing, they lag behind as a magnet for migrants than places that are still more expensive
and where the housing stock has hardly grown (red star in Figure 3). Finally, cities like
Cleveland, St. Louis, Pittsburgh, Milwaukee, Detroit or Hartford (pictured by a blue circle in
Figure 3) have neither expanded nor witnessed strong increases in house prices nor (with the
partial exception of Hartford) attracted migrants. Their economic performance (with the
exception of Pittsburgh) has also been substantially below par.
Figure 4 shows a positive relationship between house price growth and population
growth, though with considerable dispersion at the level of individual metropolitan areas.
17
Figure 4. House price vs. population growth, %, 1990-2010.
Supply adjustments can be made by using new ‘develop-able’ land or by changing
housing stock on existing land (for example through in-fill or greater density). In Figure 5, a
strongly positive relationship is observed between population growth and expansion of
developed area, consistent with the way that many rapidly growing American metro areas
expand on their periphery.
18
Figure 5. Population growth vs increase in developable area 1990-2010.
But once we consider the third combination of relationships, between ‘develop-able’ area
and house prices, as in Figure 6, there is no relationship. It seems plausible that rapidly
developing urban areas that are expanding outward on their urban fringe benefit from the low
land prices on the develop-able fringe, which in turn lowers their average housing prices, as in
the cases we cite above. We cannot capture the effect of available land in declining urban areas
(such as Rustbelt cities), which would have vacant land available for development. In any event,
in large and mature urban areas, the metropolitan fringe is already far away from the core and
long occupied (and sometimes has hit natural geographical barriers), raising commuting times.
That is why policies attempting to increase supply are directed to already-developed land in the
urban core, with its strong structurally high land prices, in addition to the declared policy goals
of developing near public transit. Why are aggregate supply changes in this type of metropolitan
19
core area unlikely to have a strong effect on reducing housing costs overall, through social and
spatial trickle-down effects?
In what follows, we argue that the missing element in determining housing prices and
affordability in these cities is the structure of jobs and incomes, not aggregate supply policies.
Figure 6. House price growth vs. increase in developed land area, %, 1990-2010.
Incomes and urban size drive housing prices
The difference between expensive and expansive urban areas is the income and wealth
underlying the structure of housing demand. The share of very high-income households in the
San Francisco Bay Area increased from 17% to 27% of the total in the 2001-2013 period
(Bronstein, 2017). This was principally driven by the concentration of high-skill, high-wage
20
employment in agglomerated core industries of the 3rd Industrial Revolution.4 Real incomes
in high-wage and high-amenity metropolitan areas, even after accounting for housing costs,
are on average 15% higher than in lower-wage metropolitan areas (Kemeny and Storper,
2012). These prosperous regions also generally have high levels of income inequality,
resulting from a growing gap between the wages of the high- and the low-skilled (Baum-
Snow et al., 2017). In these prosperous metropolitan areas, low-skilled jobs are largely filled
by international migrants, because low-skilled domestic workers have largely stopped
migrating to them. Foreign migrants have a variety of housing strategies, ranging from high
densities, overcrowding and substandard conditions, to long-distance commutes. In spite of
these supposed barriers, both unskilled and skilled workers keep on moving to these cities
(Lindley and Machin, 2004). Another element of population growth in large agglomeration is
the young. The young are not yet at the top of the skill-wage hierarchy, but are willing to put
up with difficult conditions in the short run in order to build their experience on the job
escalator (Jayet, 1983; Glaeser and Maré, 2001; de la Roca and Puga, 2017).
Let’s return now to the case of the less-skilled domestic worker population, whose
inter-regional mobility is said by the mainstream housing view to be impeded by housing
costs. Autor and Fournier (2019) reveal that the hourly wages of less-skilled adults in the
USA, which formerly rose steeply with density, no longer do so, whereas the hourly wages of
the skilled are ever more strongly positive to density. This has contributed to a widening rural-
urban divide in skills: the share of working-age population with a college degree is now 20
percentage points higher in urban places than in rural ones. In 1970 that gap was just five
percentage points. Several decades ago mid-skilled work was clustered in big cities, while
low-skilled work was most prevalent in the countryside. No longer; the mid-skilled jobs that
remain are more likely to be found in rural areas than in urban ones.
The wave of inter-regional divergence in the location of different types of job since the
4 A longer term perspective on San Francisco finds that changes in wages explain most of the variation in housing
costs in post-war San Francisco (Fischer, 2016).
21
1980s (innovative/agglomerated/non-routine versus routine) has affected the geography of
housing prices. Formally, this is modelled within the New Economic Geography tradition as a
spatial split between the prosperous metropolitan areas, which agglomerate innovative high-
wage industries, whose wages are weakly affected by spatial competition, and other territories
whose industrial mix is dominated by activities that are strongly tradeable, involve routinized
work, and are subject to global competition (Venables, 2018).
The agglomeration effect in prosperous metro areas involves an intra-metropolitan
dimension as well, which is a recent change in a greater proportion of housing preferences
toward access to centrally-located urban amenities, transportation and – for some – greater
proximity to employment. This phenomenon has driven up housing prices in the core of
prosperous metropolitan regions, such that distance from urban centres imposes an increasing
penalty on house prices (Partridge et al., 2009), in an inversion from patterns in the mid- to
late 20th century, when skilled employment agglomeration forces were weaker. The demand
for more central locations is, by contrast, weaker in successful Sunbelt metropolitan regions
such as Atlanta or Houston, with their relatively weak residential urban cores, as compared to
cities such as Boston, San Francisco, New York, or most large European cities. Moreover,
skilled workers located in the urban core today are not moving to the suburbs at the same
point in the life cycle as in previous generations. According to Autor and Fournier (2019),
there has been a 50-75% decline in the outmigration rate of prime age adults since the 1990s.
This may be due to the longer and steeper opportunity ladders in cities today (de la Roca and
Puga, 2017), as well as to the higher time costs of commuting in major metropolitan areas.
This creates greater competition for inner metropolitan locations than was previously the case,
reinforcing the notion that less restrictive zoning is likely to gentrify inner metropolitan areas
but do little about housing affordability for the less-skilled.
22
The domestic migration slowdown: housing or skills? Kept out or trapped outside?
Inter-regional migration in the USA – usually taken as the canonical case of a
geographically-fluid system of inter-regional population adjustment – has declined to half the
average level that prevailed for the century between 1880 and 1980, and has remained
relatively low since (Goetz et al., 2017). A greater share of the population is spatially
“trapped” in the sense that it suffers from barriers to mobility to opportunity. But to what
extent is this a consequence of planning restrictions and lack of affordable housing, as
opposed to the nature of employment opportunities and the skills required to access them, in
dynamic cities?
Skill-biased technical change has a distinctive geography, consisting of the
concentration of skilled jobs in certain kinds of regions, mainly large – but not always the
largest – metropolitan areas. Part of this new geography reflects the increasing divergence in
the returns to education (Giannone, 2017). But the changing nature of skills also drives this
divergence. In innovation-driven agglomerations, formal education represents an entry point,
but ongoing experience effects are key to the observed divergence in returns to education.
Parts of the population thus face multiple challenges in the new economy: paying for the
education to obtain entry-level formal skills; accessing the jobs that provide experience effects
by mastering the soft codes and conventions that get them into networks and allow them to
acquire the right kinds of skills (DeLong, 2016).
Under these circumstances moving to big cities provides no immediate benefits for
workers without college education (Autor and Fournier, 2019). While building more
affordable housing in core agglomerations would accommodate more people, the collapse of
the urban wage premium for less-educated workers means that the extra housing would
mostly attract additional skilled workers. Consequently, as the prospects for improving wages
in core areas are poor and the opportunity ladder has shrunk, the choice for low-skilled
23
workers to stay put is rational (Autor and Fournier, 2019). In brief, the decline in inter-
regional migration has multiple sources, including the new geography of skills and wages,
ageing, the changing nature of skills, social networks, negative housing equity for some, and –
far down the list of causes – housing restrictions in prosperous areas.
In this light, urban economic models emphasizing the role of housing supply in
inducing or preventing inter-regional mobility make unrealistic assumptions about migration
in general. Three main points about inter-regional migration need to be emphasised: it is not
costless; housing markets have more of an income distribution effect than a migration effect
and; the political influences on both the labour supply (migration) and labour demand side
(housing regulation) are extremely complex and not amenable to the simple aphorisms of
many urban economic models. We discuss each of these in turn.
Many migration arguments of the housing as opportunity school start with the decline
in aggregate inter-regional migration. But migration is still happening; it has just become
more selective and spatially separated by skill. Skilled individuals continue to migrate to the
most dynamic places and use them as ‘escalator’ regions (Fielding, 1992, de la Roca and
Puga, 2017). This is happening everywhere in the developed world. University graduates from
the North of England flock to London and the South-East immediately after graduation,
regardless of whether they studied in northern or southern universities (Faggian and McCann,
2008, 2009). Similar processes are in evidence in Italy (Biagi et al., 2011), Sweden (Eriksson
and Rodríguez-Pose, 2017), or Australia (Corcoran et al., 2010). And the drive towards
opportunity is not limited to the highly-skilled. In the USA, the skilled move between skilled
cities (Diamond, 2016; Giannone 2017). This is essentially ‘brain exchange’, and is different
from the classical mass migration of manual workers to industrial cities of the mid-twentieth
century, as in the Sunbelt migration in the USA or the 1960s movement from the Italian
Mezzogiorno to Lombardy, Piedmont, Switzerland, or Germany.
In Europe, low-skilled migrants continue to move in large numbers. One third of
24
Romanians between the ages of 25 and 35 live outside Romania (World Bank, 2017).
Lithuanians and Poles moving to the UK have ended up conducting low-skilled activities in
London, regardless of their previous level of education (Parutis, 2014). This may reflect the
fact that European border-free movement is more recent than in the USA, where the Sunbelt
migrations of the post-war period already resettled many low-skill migrants. In both Europe
and the USA, those not moving are those who either cannot move – because of the growing
skill divide between large cities, on the one hand, and towns and rural areas, on the other – or
do not want to move.
There are variations on this theme for each country. For example, in East Germany
there is a significant skill advantage of young migrants – mainly women – over stayers (Hunt,
2006:1032). The migration difference between the skilled and unskilled young is reproduced
in countries like the UK (Faggian and McCann, 2009) and Sweden (Eriksson and Rodríguez-
Pose, 2017). In addition to the young who have failed to acquire new economy skills, many
non-migrants are older, including those who never migrated from traditional industrial areas
or did so during the mid-20th century industrial de-agglomeration wave. But that was a
generation ago.
The current domestic migration slow-down affects also middle-aged professionals.
People in this group often started their careers on the experience ‘escalator’ of the city and
moved back at one point to medium-sized cities to cash in on their acquired experience (de la
Roca and Puga, 2017; Eriksson and Rodríguez-Pose, 2017). They moved ‘back’ in search of
better quality of life for their families, a different set of amenities, more security, and lower
housing costs (Whisler et al., 2008).
Hence, large groups are caught in a ‘spatial trap’ that prevents them from moving to
more dynamic areas. Life cycles, strong family ties, emotional and material attachment to
place, and lack of employment opportunities in more dynamic areas for less-skilled and/or
older workers seriously limit the propensity of people in lagging-behind and declining cities
25
and regions in the developed world to migrate.
Lack of affordable housing in large cities may play a role in all of this, as for example
in extreme cases of negative equity (housing bubbles in certain areas, long-term depopulation
in others), but its influence will be small. The housing as opportunity school has traditionally
assumed that migration is costless – or, in the words of Glaeser and Gottlieb (2008: 159), that
“migration is cheap enough to make consumers indifferent” – but the reality is that for those
in a ‘spatial trap’ migration is anything but costless and not a realistic and/or viable option.
Hence, neither subsidized housing, nor any reasonably imaginable price effect of supply
changes induced by less restrictive zoning would overcome the skills and equity barriers or
the differences in perceptions about opportunity that these populations face in the new
economy.
Data and measurement: an air of unreality
Until recently most of the papers on housing, migration and economic performance
have avoided offering counter-factual scenarios for population distributions, the size of
metropolitan areas, and employment levels of the less-skilled that would come about in a
world of re-formed housing policy, focusing on the housing price effect (Quigley and
Raphael, 2005; Ihlanfeldt, 2007; Glaeser and Ward, 2009; Saiz, 2010). Those papers have
mostly relied on the Wharton Index, which is a turn-of- the-century survey of about 2600
municipalities, relying on responses of municipal planning directors and other officials about
‘perceived’ regulatory pressure or a survey of those that have terms such as “growth control”
in their statutes. The models using the Wharton Index associate an average effect of housing
prices on migration elasticity, but they do not differentiate the supposed effect according to
incomes, wage levels, or skill levels. There is generally no direct identification of how
housing regulation affects housing supply. This corresponds to the wide variations in housing
26
regulation in relation to housing supply change and, especially, to the fact that many
northeastern and midwestern municipalities with weak regulation experience limited new
housing construction. Adding to this weakness, in order to characterize regulation at the MSA
level, the Wharton Index tends to be aggregated up from the municipalities that control zoning
to metropolitan area levels (at which housing markets operate) without using weights for
different municipal areas within metro areas (Storper et al, 2015).
A more recent wave of research ventures into estimating how housing supply
deregulation affects, variously, population growth and city sizes, inter-regional income
inequality, income distribution, and national economic productivity and output (e.g. Hsieh and
Moretti, 2017). Though some of these authors demur about their own work by claiming to
produce only ‘instructive’ simulations, such ventures are meant to influence the policy debate.
They are picked up by the media as academic proof of the potential benefits of deregulation
for housing supply. Hsieh and Moretti’s (2017) ‘full adjustment scenario’, as housing
construction becomes unshackled from regulation in prosperous metro areas, New York gains
787% in employment, while the job base is multiplied by five in San Francisco-San Jose. The
employment loss in Flint, Michigan is, by contrast, 98%. Even in their ‘intermediate’ (and
thus supposedly more realistic) scenario, New York enjoys 179% population growth, San Jose
149% and Flint loses ‘only’ 77% of its jobs. Housing deregulation, they claim, would
generate $1.4 trillion annually in additional GDP, through a combination of wage gains and
transfer of excessive rents from landowner rents to worker salaries. The benefits of housing
deregulation would also be highly territorially uneven, as almost all of the benefits of
deregulation to the national economy would come from a three large metropolitan areas.
Yet, the authors admit that their simulations rest on unrealistic assumptions of perfect
mobility and do not consider all the conditions required for a Detroit auto-worker to move to
the San Francisco Bay Area or any other New Economy region. Ganong and Shoag (2017)
claim that housing regulation has contributed to about a 10% greater inter-regional income
27
divergence effect than would otherwise be the case. These claims about the magnitude of
potential effects of housing regulation on prices, output, income, productivity and population
are implausible, especially when the full costs of migration are taken into account.
In Europe, where planning regimes are, on average, stricter than in the US, tight
housing restrictions have also not prevented population growth. The highest-income European
regions with the most expensive housing, are those attracting the most people (Figure 7).
Figure 7. Population growth in European regions by income levels, 2001-2014.
The European example, in concert with the analyses of Diamond (2016) and Giannone
(2017) and with realistic estimates of the price of new housing in prosperous metropolitan
areas, come together to indicate that, if housing deregulation were to substantially increase
inter-regional migration – which is, as we have argued above, improbable –, the migration
would mostly accelerate the transfer of skilled-workers from less prosperous into prosperous
regions. Simulations for London suggest this would be the outcome of authorizing
construction in the Green Belt. A chain reaction would be triggered: those close to the
Greenbelt would shift further into London as others arrive on the London periphery (Szumilo,
28
2017).
Three consequences of such feedbacks are expected. First, in contrast to the conclusions
of Ganong and Shoag (2017) and Hsieh and Moretti (2017), greater, rather than lower, inter-
regional skill and income divergence would be the outcome, although the magnitude of this
phenomenon may be small. Second, any further emptying out of skills and talent in lagging
regions will further degrade their future capacity to improve their economic performance, and
further widen the development gap. And third, the intra- metropolitan movements of the
skilled will further increase intra-regional spatial- neighbourhood inequalities, while
simultaneously increase the commuting times of the less skilled, a topic we cover in the next
section.
The Effects of Upzoning: Gentrification without affordability
Hsieh and Moretti (2015) argue that NIMBY-ism in prosperous cities, and strong
housing regulation more generally, redistribute income from workers to rentiers and
accentuate income inequality (presumably placing the landowners higher in the intra-regional
income distribution), which, in turn, inhibits aggregate growth. These claims are more
plausible than those made about inter-regional migration and convergence by the housing as
opportunity school, but they still require considerable nuance.
To begin with, there is a strong and strengthening correlation between regional per
capita income and the Gini coefficient on income of urban agglomerations. Prosperous
metropolitan areas such as San Francisco, Boston, or New York are more unequal, in the
aggregate, than less prosperous ones such as Provo, Utah – although the American Deep
South represents an exception. Welfare and income redistribution systems, among other
factors, also play an important role in levels of inequality. As Musterd et al. (2017: 1070)
indicate, “segregation levels of the better-off and the worst-off are still lower in metropolitan
Europe than in the largest metropolitan areas in the United States”.
29
Some of the intra-regional inequality in prosperous cities may indeed be due to a net
transfer of income from non-owners to owners of housing, as housing prices increase more
rapidly than wages and other prices. However, the assumptions in the models behind these
assertions are often too simple and data too aggregated to shed light on this relationship. In
the San Francisco Bay Area, the households with income above $150,000 increased by 80%
from 1990-2015, with their proportion of the total growing from 17 to 27 percent (ABAG
Plan Bay Area 2040). These populations have pushed up housing prices overall, and
gentrified a small number of neighbourhoods in central areas that were formerly quite poor, as
has been the case with some former boundary areas between middle- and high-income areas.
This rising inequality in incomes powerfully affects the housing available to less-skilled lower
income workers because the existing housing stock of prosperous city-regions has been
upgraded, generating a crisis of affordability for lower and middle-income households.
The powerful effects of income inequality rather than aggregate supply emerge from
recent analysis of IPUMS data. Popov (2019) finds that in all of the top 100 US metropolitan
areas, housing costs are growing more for those in the bottom half of the national income
distribution than for those in the top half. Income inequality has risen in 45 of the top 50
metro regions, and fallen in only 19 of the top 100. Housing costs have actually fallen for the
top quartile of the national income distribution, in virtually all metro areas, but they have
strongly risen for the bottom half. This is not a new problem for the bottom half, which is
paying about the same share of its income for housing today as in 1980. The difference is the
fall in the housing costs for the top earners. Part of this is attributable to the landowner bonus
that figures prominently in Hsieh and Moretti (2017), because the top income earners have a
higher proportion of owners. But even for renters, top income households show a decline in
income going to housing costs, while the bottom half of households that are renters show an
increasing share going to housing costs, in a result consistent with Freemark’s (2019) detailed
results for Chicago.
30
Building on these data, we now argue that policies such as blanket upzoning, which will
principally unleash market forces that serve high income earners, are therefore likely to
reinforce the effects of income inequality rather than tempering them, as we now argue.
Combes et al. (2018) show that the elasticity of land prices between centre and periphery of
metro areas is non-convex, and rising with urban size. Supply changes must then be large and
central to bend this curve appreciably and thereby generate trickle-down effects to other areas.
Thus, upzoning at a regional scale would trigger new housing construction in the
neighbourhoods where the skilled workers want to live: the already-gentrifying areas and the
extensive boundary zones between them and other neighbourhoods. This would allow more
skilled workers in the upper quarter of the income distribution to live in the metropolitan core.
Moreover, through filtering, producing housing for high income households will prevent them
from directly outcompeting low-income households for older and lower quality housing stock,
but it would very likely involve replacing older and lower-quality housing stock in areas highly
favoured by the market, effectively decreasing housing supply for lower income households in
desirable areas. This is gentrification.
However, there is virtually no evidence that substantially lower costs would trickle
down to the lower two-thirds of households or provide quality upgrading of their
neighbourhoods, but it undoubtedly would enhance displacement in neighbourhoods currently
at the boundary of higher-income inner metropolitan areas. Indeed, according to Zillow data
reported in The Washington Post (August 6, 2018), rents are now declining for the highest
earners while continuing to increase for the poorest in San Francisco, Atlanta, Nashville,
Chicago, Philadelphia, Denver, Pittsburgh, and Washington, noting that a boom in luxury
construction in these areas has failed to ease housing market competition for cheaper
properties. And while there is more evidence of filtering, this seems to have also stalled.
Let’s now expand on this point about the relationship of intra-metropolitan housing
choice dynamics in the face of increasingly unequal inter-personal income distribution.
31
Income inequality in prosperous metro regions strongly affects less-skilled lower income
workers, forcing them into painful arbitraging of their residential locations within such
regions, usually to outer suburbs. This often involves long commuting times and high
transport expense that affect the quality of their lives disproportionately compared to higher-
income workers; barring that, it involves subject status downgrading in order to live in more
central but less amenity-rich neighbourhoods.
A different type of arbitraging is at work for less skilled foreign immigrants.
Intergenerational social mobility is higher in the more prosperous metropolitan areas (Chetty
et al., 2014), still making them magnets for the less skilled immigrants. But while foreign
immigrants are willing to accept poor living conditions (higher house prices in lower quality
neighbourhoods), low skilled domestic migrants are less likely to leave their places of origin,
as they already have a higher relative social status than they could achieve by moving to a
prosperous metropolitan area.
In any event, all types of lower-income households in prosperous regions pay the
price of ‘displacement’ in competing with higher-wage workers who benefit from upzoning to
gentrify neighbourhoods, as they occupy its newer, higher quality housing. None of the extant
models or simulations provide realistic estimates of how much new housing would result from
upzoning in prosperous regions, or the realistic geographical distributions of such new supply,
the magnitudes of intra-metropolitan sorting of the skilled to new housing stock, and inter-
metropolitan increases in skilled in-migrants, and their effect on housing competition (see also
Freemark, 2019).
It follows that without active policies to help low-income housing consumers and their
neighbourhoods, the less-skilled would not benefit from the blanket upzoning policies
prescribed by the mainstream literature. As indicated by Jacobus (2019), if upzoning leads
mainly to build, as seems to be overwhelmingly the case, “only high-end housing, everyone
may see some benefit, but most of the benefit will flow to the rich”. This is evident as both
32
more un-regulated (Houston, Phoenix, Orlando) and highly-regulated and supposedly
NIMBY-ist (Boston, New York, San Francisco, London, Paris and most large European
cities) housing markets feature high levels of housing segregation by income, and increasing
commuting times, especially for low-income residents.
Segregation by income, race, national origin and other vectors, of course, has manifold
structural causes (Sampson, 2012, 2018; Boustan, 2017). Even in cities with strong ‘mixity’
policies (such as Paris), market forces push in an opposite direction, although renter
protections can slow down the gentrification and segregation processes (with other side
effects). Regulation and other policies are often supported by residents who wield political
power, to enforce homogeneous neighbourhood quality and resist dis-amenities, with the
intended or unintended outcome of segregation. Overturning these regulations, however, has
little to do with any general liberalization of housing markets. In Chicago, for example, it has
been found that upzoning has had unintended consequences, such as raising housing prices
without necessarily triggering additional construction of newly permitted dwellings
(Freemark, 2019). Highly deregulated Atlanta or Houston also tend to be more segregated
than most highly regulated cities. Indeed, the policy mix that would be required to reduce
segregation in the name of providing better access to jobs and transportation, reducing
commuting times, and getting access to better schools and amenities for lower-income groups
has largely eluded research, even though there is evidence that when lower-income groups
access higher-quality neighbourhoods there are strong positive effects on childhood
development (Chetty et al., 2015). As a whole, the housing as opportunity school has failed to
properly internalise in their models that the intra-urban housing market is highly segmented,
and that large different spatial and structural factors affect the characteristics of within-city
submarkets (Watkins, 2001; Jacobus, 2019). For our purposes here, it suffices to say that
upzoning is not the kind of delicate and complex policy mix that is required to address
interpersonal inequality in our cities. Most importantly, undifferentiated aggregate supply
33
policies do essentially nothing to abate the underlying structural causes of the housing crisis in
prosperous metro areas that we have identified: high demand from highly-skill, high-income
people; increasing income inequality; and a rise in construction and land costs consequent
upon the growth and maturation of metropolitan regions and demands for a higher-quality
urban environment. The targeted policies that would be needed to reduce spatial-economic
segregation involve increased regulation and other forms of public intervention into the
housing market, exactly the opposite of the deregulation approach. The evidence from cities
with active public/social housing programmes (such as New York, Paris, and London) is that
this requires high public subsidies for construction of affordable housing.
The uses and misuses of theory
The housing as opportunity school has become vocal and assertive about the political
and policy uses of its research, but, as we have argued, its research is, in our view, not
scientifically solid enough to merit this assertiveness. The reasons for this are:
Its failure to consider the influence of labour demand on influencing changes in the
level and composition of the population of cities. A growing body of evidence shows that this
is the main driver of population sorting across regions today;
Its inability to demonstrate that housing supply change is a principal contributor to
inter-regional patterns or magnitudes of migration, alternative city size distributions, and
aggregate economic outcomes, especially in comparison to the geography of labour demand
and skills;
Its incapacity to effectively prove that zoning is the principal reason behind rates of
housing supply change or inter-metropolitan location of new housing, as opposed to changing
effective demand, structural causes of construction costs, land assembly, first nature
geography, among many other potential causes;
34
Its failure to establish a clear link between housing regulation and the size or nature of
housing price changes, in comparison to the geography of employment and incomes and
general changes in the income inequality;
Its lack of consideration of the intra-metropolitan effects of general zoning
liberalization, erroneously concluding that a general deregulation of housing construction in
high-income metropolitan areas would generate widely-distributed price and income benefits,
socially and spatially, through a trickle-down effect from the luxury market to lower-income
groups (‘easing housing competition’).
Many of these weaknesses stem from the underlying spatial equilibrium model that is
used with few questions in much of urban economics today. The field needs an enriched and
more realistic spatial equilibrium model, fully incorporating the geography of labour demand
and ranked preferences (e.g. Schwartzman, 2017). Households consider not only the average
cost of housing when considering mobility, but, first and foremost, the type of jobs available
given their skills. In today’s circumstances, less skilled domestic workers avoid big,
expensive cities not simply because of high average housing prices there. They could secure
some type of housing in these vast metropolitan markets, as most external migrants do.
Nevertheless, the declining urban wage premium for internal less-skilled migrants, combined
with uncertainty about the future of their income in the face of ongoing technological change,
as well as their likely high commute times and subjective status downgrading (such as having
to co-locate with immigrant groups whom they consider to be of lower social status than
themselves if they want to avoid long commutes), shape their decisions not to move to
prosperous cities. There is no realistic housing supply expansion in prosperous metropolitan
areas that could address the employment and residential utility requirements of less skilled
domestic workers and enable them to move massively to prosperous regions.
In the face of what remains an insufficiently developed scientific case, however, the
political uses of the housing as opportunity position have become quite prominent. Opposition
35
to more lax planning regimes – and to theories that promote the development of the London
Green Belt or constructing on the park lands that encircle the hills of the San Francisco Bay
Area – comes not only from rich, rentier land owners, but also from ordinary citizens that
appreciate green spaces in their daily lives, as well as dedicated environmentalists, yet they
are now depicted as NIMBYs opposed to social justice, backed up by prestigious academic
authorities. In lagging regions and in the populist – and, increasingly, the mainstream – media,
residents of prosperous regions are depicted as erecting ramparts to keep out the less fortunate
(e.g. Guilly, 2016; Edsall, 2018). There is little consideration of the fact that the high-skilled
workers, who are the main political constituency of the YIMBY movements, might be more
motivated by self-interest than social justice. Part of the mainstream academic literature may
also have become – wittingly or unwittingly – a stalking horse for developers whose primary
interest is not in reducing socio-spatial inequalities or spreading prosperity. Serious
affordability policies, which inevitably involve public subsidies and regulation, as well as
measures to finance them, are curiously absent from the literature, with its focus on
deregulation.
It is also worrying that policies aimed at promoting place-sensitive development in the
left-behind regions, where large numbers of individuals are becoming increasingly spatially
trapped continue to be dismissed, out of hand, as deadweight loss subsidies “targeting heavily
distressed areas into which outsiders are unlikely to migrate” (Kline and Moretti, 2014: 657).
It is our view that too much is being promised to policy-makers about the supposed
potential benefits of housing market de-regulation. At the same time, in the rush to promote
an oversimplified vision of “densify near transit stops”, too little consideration is being given
to the policies that would promote affordability for the right people in the right places.
Moreover, planning deregulation and housing construction in prosperous regions – while
interesting issues – are not going to solve the problem of areas lagging behind. However, an
excessive focus on these issues at the expense of serious and sustainable development
36
strategies, can fuel economic, social and political distress and anger in declining and lagging
areas that can threaten the very foundations on which economic activity, both in less
developed and more prosperous areas, has been erected in recent decades (Rodríguez-Pose,
2018). It is vital to keep considering the important role for regulation and other forms of
public intervention in combating the severe socio-spatial inequality that afflicts prosperous
metropolitan areas today. And, to return to our introductory discussion, it is ever more vital to
consider that a complex array of problems contributes to the current stagnation of less
prosperous regions, notably the structural changes in the spatial distribution of employment,
agglomeration forces, and the types of skills that are in demand today.
Acknowledgements
The authors are grateful to the managing editor, two anonymous reviewers, and to David
Abel, Michael Manville and Richard Walker for comments and suggestions to earlier versions
of the manuscript. The usual disclaimer applies.
37
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APPENDIX
Figure A1. Relationship between city size and population change in the US, 2000-2016
Population growth 2000-2016, relative to population in 2000
0 5M 10M
MSA Population in 2000 (million)
15M 20M
Population growth 2000-2016
Fitted values
Circle size determined by population in 2000
95% CI
-1.
0
0
0.
0
0
1.
0
0
2.
0
0
3.
0
0
4.
0
0