Below is an interview transcript with Gerrit Knaap. This transcript is part of a series of interviews that are meant to shed light on how experts think about inclusionary zoning. You can see a full listing of all the transcripts here. This transcript was lightly edited for clarity.
Owen Pickford (OP): Last year, they were looking at a linkage fee policy and through a long drawn out process they are now looking at an inclusionary zoning policy. They are probably going to implement an inclusionary zoning policy that requires between 3-10% of units to be subsidized or below market rate. They are going to implement it in areas they are calling urban centers or urban villages. These are areas the planning department has designated as areas of growth. They are probably going to couple that with an upzone. They’re going to add height to commercial mid-rise areas and they’re going to upzone some single-family areas that are basically detached single-family homes right now. When they do the upzone, they’re going to implement the inclusionary zoning so it’s going to happen at the same time. The inclusionary part is going to be applied to the entire structure not just the upzone part. That’s the policy we’re looking at.
OP: I’ve done quite a bit of reading including reading your piece of research you did. I’ve had a ton of conversations here with people about the politics of this. Generally speaking, I would say, within the circles I speak with, the biggest controversial part is whether or not the inclusionary requirement will cause a reduction in housing supply. I’ve read the papers and as far as I know there are two papers that suggest that’s how things work. One is kind of bunk. It’s the Powell and Stringham paper. Are you familiar with that?
Gerrit Knaap (GK): No it doesn’t ring a bell.
OP: Ok, it was published by the reason foundation and they looked at California. They came to the conclusion that inclusionary zoning reduced the production of housing by tens of thousands of units or something like that but it wasn’t peer reviewed. And then there’s a paper out of the Furman Real Estate Center in New York. Are you familiar with that one?
GK: I’m sort of familiar with the Furman Center. I’ve probably seen this paper but I’m not remembering at the moment.
OP: They looked at three municipalities, Washington DC, Boston and San Francisco. They found a small, minor affect in Boston. They didn’t find an affect in San Francisco and they couldn’t come to a conclusion in DC.
GK: That sounds familiar.
OP: So those are the ones that found a negative affect. And then I think there are three papers that I didn’t think found any connection. So there’s your paper. Is it fair to summarize your paper as not finding a decrease in supply of housing? Or would you not summarize it that way.
GK: I don’t think so. We found a small decrease I believe in the supply in single-family housing. There was some shift from single-family to multi-family. As I recall, there was not an overall deduction in the total supply. I’d have to go back and double check that. What I think we found was that there was slight decrease in single-family housing growth, not a decline in supply obviously. And a slight increase in price depending on the housing market.
OP: Yeah, I do remember that as well. An increase in the price, was it single-family housing or overall?
GK: I believe it was single-family.
OP: Then there’s also this paper from UCLA, I believe, by Vinit Mukhija. I’m not sure if you’re familiar with that.
GK: Doesn’t ring a bell.
OP: Ok, and then there’s a paper by David Rosen as well. Those are the three I’m thinking of. The David Rosen paper didn’t find an effect on housing supply and the paper that Vinit did also did not. There’s the empirical research and then there’s some speculation and opinion. I’m kind of curious, if you were to speculate, one do you think a well crafted inclusionary zoning policy can avoid affect affecting supply?
GK: Holding other things constant, I’m trained as an economist, so an inclusionary zoning policy does impose additional burdens on housing producers. If you do nothing to mitigate that, I think there can be adverse effects. And it depends on how you define adverse of course. But I’m trained to believe that if you make something more costly to produce, there’s going to be less of it and it’s going to cost more.
OP: Yep, so I think that if you read the David Rosen paper, and I’ve had this conversation with a few other people, the debate about that is how that costs get handled. That’s the crux of the debate and there’s three theories. The paper out of the Reason Foundation made the argument that it’ll make project not pencil and it will reduce supply. And then I’ve talked with a few different people and another argument I’ve heard is that developers are going to go out and increase the price of the non-subsidized units, the market rate units, to make up for their loss on the subsidized units. I don’t know how reasonable that is. The criticism of that argument I’ve heard from other people is that developers are going to charge whatever the market can bear, regardless. People who think it won’t reduce supply, is that the developers will bid less on the land they purchase. Those are kind of the three different mechanics that are possible. Is that a fair summary?
GK: Yeah, I would agree with that analysis. The answer if you dug further, then it depends on the elasticity of supply and demand. Developers will push it forward if the market allows it to be pushed forward and they’ll push it back if you’re in a position where people can readily go somewhere else and not willing to pay higher prices and they’ll just offer less for the land.
OP: Why would developers not be able to offer less for land? When I’m thinking through the mechanics of how the project is built, that’s the first opportunity they have to affect their costs. They can’t really affect their costs through higher rents until after a project is built. So in my head the first thing they’re going to do is try to build less on land based on current rents. Why would they not doing that?
GK: Let me turn the question around. Why would they not increase the price? And the answer is they’ll increase the price if the market allows them to increase the price. And if they increase the price they don’t have to reduce the bids for the lands. If they’re unable to push the price forward to consumers and increase the price of the product, then they’ll bid less for the land. Another thing I’ll say is that a lot of developments, and I’m not sure about the nature of the land market in Seattle, but the land is already in the pipeline for development for the ability to negotiate on land prices may be past, so the timing is important.
OP: Yep, one of the solutions that people have suggested is the importance of phasing this in over a long period of time. The land it will affect, the future bids will be priced in because they know it’s coming. With most of our permits, you’re requirements are grandfathered in. If you already have your permit in and an inclusionary zoning requirement comes, you don’t have to do that. The requirement at the time you put the permit in is fine. But if you own the land and you haven’t done anything with it and you’re just holding on to the land, then yeah, they’ve already purchased it in that case.
GK: The other mitigating effect, which I’m sure you know, is that if everything gets upzoned then the supply affects are going to be much smaller.
OP: That’s another thing I’ve found confusing too. Inclusionary zoning is always a percentage of the total units in the building, so it’s going to be 3% or 10% or whatever. there’s probably going to be cliffs where you can add a certain number of market rate units without having to add another subsidized unit. But generally speaking, it wouldn’t really matter what the zoning is because the percent you’re paying is always the same.
GK: That depends on the program. It sounded like what you were saying was that everything is going to be upzoned and you’re going to have a mandatory inclusionary zoning requirement. The other way people sometimes do it is that you get an upzone if you include the inclusionary units. The percent that it’s upzoned depends on the percent of inclusionary units.
GK: The other thing I would say is that these details matter. Is it mandatory? Is it voluntary? Is there a density bonus? What percent? All that stuff matters.
OP: So generally speaking, you think that markets may or may not pass the cost on to other rents or they may or may not pass it on to land depending on the circumstances in the housing market?
GK: That’s correct. That would be an accurate statement, reflecting my opinion exactly.
OP: Can you explain a hypothetical housing market where a developer would be able to pass it on to their renters? In my head I’m thinking that a developer is always going to charge the most they can for units. It’s not going to change the amount they charge based on the fact that a new policy is implemented.
GK: If you raise the rent, people are going to be inclined to look for other places to rent. If there are readily available substitutes at a lower price, just across the border for example… This is the City of Seattle you’re talking about? It has the potential to make renting in Seattle more expensive relative to renting outside the city, somewhere else in King County. The extent to which people are willing to make that move influences the degree to which that spillover occurs. If Seattle is an extremely competitive market and it must compete with the rest of King County, or the Puget Sound Area, and the rents can’t increase because there are cheap rents elsewhere, then you can’t push it on to renters. If on the other hand people are determined and willing to pay a premium for living in Seattle then it’s possible for the developers to push those costs forward to the renters.
OP: In my head I think of housing markets as regional. Your job and family are in a region so you might choose different housing options in that region. So you’re kind of saying that if there’s an area in the region that doesn’t have that cost, people might choose to live in that area rather than the area in the region with that costs?
GK: Yep, or choose to build there, sure.
OP: That’s the circumstance of it being passed on to renters. What’s your hypothetical scenario in which the costs are passed on to landowners?
GK: Let’s say there is in fact a regional market in which there’s extensive mobility and substitutability across the region, if then the city adopts this policy, developers try to push rents up and they won’t go up because people simply leave. There are more affordable rental units elsewhere so vacancies rise and they can’t increase the rents. In that case it has to get pushed back down to the landowner.
OP: Both times you’ve explained this, the way I’m hearing this is that the first thing the developer will do is try to increase rents. Do you think that’s true? Or is that just a quirk of how you’re explaining it?
GK: It’s more the way I’m explaining it. These things all happen somewhat simultaneously, in theory. In fact, it happens unpredictably.
OP: Ok, so generally speaking do you think inclusionary zoning policies can be crafted in most places in a way that minimizes that harm?
GK: Yeah, I tend to be supportive of these policies for two reasons. One, it’s a way to increase the affordable housing supply. It’s a complicated way. The other point I would make is that these programs get complicated. A lot of the details matter and it needs to be embedded in the approval process, the zoning process and the developers understanding. It tends to be a complicated way to increase the affordable housing supply but it does that. The other, and I think stronger argument for inclusionary zoning, is that it results in a mixing of incomes in different parts of the region. I think that’s really important.
OP: That kind of answers my next question but I’ll ask it anyways in case you have anything else to add. If you were the dictator of a city and you had to choose between the policies that you were going to prioritize, what would be the first affordable housing policy that you would go after? I’m trying to understand if there’s other policies out there that serve the same needs that inclusionary zoning serves.
GK: I’m sure you know the range of affordable housing strategies. One is you subsidize the construction with tax credits and things like that. The other is you subsidize renters, you provide housing vouchers and so forth. The third general category is inclusionary zoning policies that through regulatory requirements to increase the housing supply. If you’re asking me which one I would choose, I think you minimize market disruption by doing them all.
OP: There’s kind of two other policies that may fall into those categories that might be a little different. One is social housing, publicly owned housing. The other is rent control. Rent control could be seen as a subsidy for renters and public housing could be seen as subsidized construction. Any thoughts? Do you think those are viable alternatives?
GK: I think they are viable but less preferable. You don’t want concentrated poverty which most public housing tends to do but there are now more progressive public housing policies. And rent control, I’m not a big fan of rent control.
OP: The other question I wanted to ask was of your colleagues, of the people you know that pay any attention to this, are there people who you have disagreements with on inclusionary zoning policy? Can you articulate those disagreements in a representative or legitimate way of what people who disagree with you might think?
GK: The people I tend to disagree with are people who believe there are no opportunity costs, that you can impose these policies with no impacts. I think there are impacts. I think they can be mitigated. I think sometimes those impacts are worth it because of the objectives you are trying to achieve. But I often have disagreements with people who believe there will be no impacts.
OP: Why would someone think there’s no impacts?
GK: I have no idea. I thought you already described people who had that belief?
OP: My thought is that might be people who think the cost is eaten by the landowner but I would assume that would be an impact as well right?
GK: Yep, alright, that’s true. My sense is that everybody pays a little bit. Assuming it all goes one direction is usually not a safe assumption.
OP: Is that actually a well represented view? Do you think that’s a legitimate thing other people think?
GK: I’m not sure what you’re asking?
OP: Have you had conversations with people who think that? That there’s not an impact or something like that?
GK: There are people who believe that. Most of the housing advocates for example.
OP: Ok, the last thing, if you’re telling a city what they should pay attention to, or what they should focus on when they’re implementing a policy like this, what would you tell them?
GK: I would focus on the details and try to make the process as efficient as possible. Gradually working this in. These policies tend to change over time. How you evolve to make this policy effective is important.
OP: Are there good examples of places that have done that that come to your mind right away.
GK: Yeah, Montgomery County.
OP: Ok, do you think they’re kind of the gold standard?
GK: Yeah but one of the things you’ll see that’s in one of the papers we sent you is that I’ve noted that the Montgomery County Plan has really changed over time.
Gerrit-Jan Knaap, executive director of the National Center for Smart Growth Research and Education, is an economist and professor of Urban Studies and Planning in the University of Maryland’s School of Architecture, Planning and Preservation. You can read more about him here.
Owen does servicing and consulting for a software company to pay the bills. He has an amateur interest in urban policy, focusing on housing. His primary mode is a bicycle but isn't ashamed of riding down the hill and taking the bus back up. Feel free to tweet at him: @pickovven.