Inclusionary Zoning Would Undermine Sacramento’s Recent Housing Reforms

Sacramento recently took a major step toward fixing its housing crisis by adopting the “Missing Middle Housing Plan,” which will allow apartments to be built in single-family neighborhoods. In urban-planning lingo, this is “upzoning,” which raises the density limits in designated areas. Low density limits are among the largest contributors to housing shortages nationwide, so Sacramento’s reform is sure to encourage construction.

In the wake of the plan’s adoption, however, many people are calling for an “inclusionary zoning” mandate. Inclusionary zoning requires builders to set aside some of the new units for “affordable”—which is to say, below-market-rate—housing. This is to ensure that developers do not neglect the lower class in favor of buyers of more-profitable luxury dwellings.

The city council is split on the idea. “Just because something sounds good, doesn’t mean it is good,” Councilwoman Lisa Kaplan demurred. “Are we creating unintended consequences?” The answer to Kaplan’s question, according to a wealth of research, is a resounding yes.

Inclusionary zoning was invented in Fairfax, Virginia, in 1971, but it quickly gained popularity in California. By 1981, 22 localities in the state, as well as the California Coastal Commission, had implemented some form of the policy.

At the time, Professor Robert Ellickson of Stanford University cautioned that inclusionary zoning was “likely to aggravate the housing crisis it has ostensibly been designed to help solve.” Because the policy requires a number of units to be offered at less-profitable below-market prices, Ellickson argued, it would constrain supply. Affordability mandates were  essentially a tax that discouraged construction, raising the price of housing overall.

In the four decades since Ellickson’s prescient warning, California’s housing crisis has deepened dramatically. One might think that policymakers would have learned their lesson, but the new trend is to pair inclusionary zoning with liberal reforms that raise density caps, as Sacramento is now considering.

The question, then, is whether the benefits of upzoning outweigh the negative consequences of affordability mandates.

A recent study from New York University’s Furman Center examined Seattle’s inclusionary-zoning reform, implemented in 2020. The study found that areas of the city that were not rezoned had more housing built than did the inclusionary zones with higher density caps. In other words, inclusionary zoning deterred more construction than upzoning encouraged.

Their findings should have been unsurprising. Economists Benjamin Powell and Edward Stringham found similar results in Watsonville, California, which saw housing construction come to a standstill in the decade after adopting inclusionary zoning. The city eventually lowered its affordability requirements and saw a 12 percent jump in housing units in only three years.

Economists have found similar results in New York and Virginia, among other places. The findings consistently point to the same problem: mandates for below-market units increase the price of housing on the whole.

So does this mean developers should be free to build whatever they deem most profitable? Absolutely. UCLA’s Lewis Center recently surveyed several studies on market-price development and found that rents had declined across the board.

When left unconstrained, developers build housing for all income levels. California’s recent audit of San Francisco’s housing policies confirms this. It found that streamlined permitting under SB 35 combined with the State Density Bonus Law incentivized builders to construct more 100-percent affordable developments, far exceeding what had been built under San Francisco’s inclusionary-zoning policy.

The best way to promote affordable housing is to liberalize zoning and permitting requirements without imposing affordability mandates. Even if builders exclusively constructed luxury units, this would create vacancies elsewhere, allowing everybody to move up a rung on the housing ladder. Rising tides lift all boats.