On Tuesday Sightline Institute’s Executive Director Alan Durning and Senior Researcher Dan Bertolet published a long meditation on inclusionary zoning (IZ) economics that misrepresented several key facts and relied heavily on argument by analogy rather than empirical data. The article–although focused on how inclusionary zoning is generally problematic–actually argues that Seattle’s iteration of inclusionary zoning with offsets is good and strikes the right balance. On the second part we can agree.

Or at least we did until later in the day when Bertolet maybe changed his mind. You be the judge of this comment on the popular Facebook group City Builders: “Portland has the right approach to IZ. (Not so sure about Seattle…)”  It’s perhaps no surprise since Bertolet was a noted critic of inclusionary zoning before he joined Sightline (here, here, and here). And he continued to be pretty skeptical in his previous Sightline musings: “Getting [inclusionary zoning] right will be like shooting an apple off someone’s head with a shotgun: you’d better aim high. Oh, and the person with the apple is also dancing.”

What exactly was Sightline trying to accomplish with its latest harsh critique of inclusionary zoning but not necessarily Seattle’s example? Perhaps they just want to make sure cities adopt strong well-balanced inclusionary zoning policies rather than counterproductive ones, a goal we share. A more cynical take: they wanted to cover their market urbanist street cred even while still ostensibly supporting Seattle’s IZ program, which Durning helped negotiate as a member of the Housing Affordability and Livability Agenda (HALA) committee. Perhaps they’re just trying to keep the affordability requirement as low as possible.

Why does it matter? Seattle leads the nation in tower cranes–a lot of housing construction is happening–but Seattle also apparently leads the nation in rent increases. Even with all the construction, Seattle has a housing shortage, albeit the scale of the housing shortage is sometimes exaggerated. In such an environment, we must help residents weather skyrocketing rents. Seattle is still in the process of enacting inclusionary zoning or “Mandatory Housing Affordability” (MHA) as the City has branded it. The MHA framework was passed in two parts over the past year, but the City still needs to finalize and pass the development capacity increase changes (commonly referred to as “upzones”) for the program to go into full effect. The U District upzone is expected to be the first passed within a few months followed by Downtown and South Lake Union. Later in 2017, the rest of the city’s urban villages and centers (and other urban pockets) should see the zoning changes to take MHA city-wide. HALA is expected to create 20,000 rent-restricted housing units over the next decade, with 6,000 of those from MHA (and who knows maybe more if production is strong). Most housing advocates want to see this vision carried out, and the mayor has even suggested it may prove a national model.

While Sightline quibbles over the proper parable to encapsulate a housing market, we’ve been arguing for increased upzones to unlock a higher inclusionary requirement. The way the program is set up, a “M2” class zoning change raises the requirement to 9 to 11 percent rather than the lower 5 to 7 percent requirement with lower “M” capacity increases. M2 means a big increase in capacity, not just a modest additional floor or two. The City can still alter its zoning maps to create more M2 zoning with a 10 percent inclusionary requirement. This would be a huge win for expanding housing capacity and boosting affordability. It’s still within our grasp; we only have to build the political will for slightly bigger upzones.

A breakdown of proposed MHA requirements by use, area, and development capacity change. (City of Seattle)
A breakdown of proposed MHA requirements by use, area, and development capacity change. (City of Seattle)

Aside from long-running philosophical debates, the important thing is for Seattle to pass its inclusionary zoning program by passing the upzones. That said, to inform policymakers, it’s also important to strive for accurate and evidence-based economic theory. Here are some ways Sightline’s piece didn’t do that:

  • Admits the empirical research is inconclusive, but makes firm conclusions nonetheless. Here is the operative sentence: “A handful of empirical studies have attempted to assess the real-world performance of IZ programs, and not surprisingly, the results are inconclusive…” Remember that as you read all the conclusions they drew from inconclusive research and their own presuppositions and thought experiments.
  • Exaggerated IZ’s proven effect on housing supply. We published a series of interviews with inclusionary zoning experts showing the consensus that inclusionary zoning with offsets has not been proven to decrease supply substantially. In some case studies, IZ programs seem to not affect the supply of housing and only minimally affected supply in a few others. Plus, generally speaking, the Seattle program is more conservatively designed than most out there because the requirement is relatively low and is linked to greater development capacity.
  • Dismissed land value capture theory based on a hunch. We present not just theory but data that suggests inclusionary zoning can and likely will capture land value while not diminishing land sales since land is an inelastic good. That would mean some of the costs of inclusionary zoning will be borne by landowners and thus lessen the cost to developers and the likelihood of rent increases being passed on to market-rate renters and the lower severity if costs are passed on.
  • Ignored that IZ works in tandem with other affordable housing policies such as the housing levy. Durning and Bertolet seek to paint IZ as falling only on new construction which is true, but they suggest everyone else contributes nothing which is false: “A drawback of IZ is that its burden falls only on those who build housing. Property owners of existing buildings reap the benefits of appreciation in fast-growing cities: they sell at higher prices or collect higher rents. Yet under an IZ program, these owners, whose property values have increased largely due to the efforts of the surrounding community as a whole, nevertheless contribute zero toward the public good of providing affordable housing. IZ lets the majority of landowners off the hook.” Look no further than the recently doubled housing levy for a counterexample.
  • Overestimated the power of upzones alone to help low-income households in the short-term. Durning and Bertolet suggest each denied market rate home prevents a low-income household from being priced out: “And each project rendered infeasible might be 200 homes not available, which through the machinations of the housing market shuts about 200 low-income households out of the city.” Moreover, they allege upzones alone would help even more than inclusionary zoning linked to upzones: “Wouldn’t offsets without IZ be even better than IZ with offsets? For maximizing overall housing choices, the answer is: yes!” Maximizing housing choices is a nice little euphemism but the choice of a unit someone can’t afford is no choice at all. Until we invest much more in subsidized housing either by enacting a land value tax or a much bigger housing levy, inclusionary zoning is a crucial stopgap and an unique force for economic integration.
  • Ignored that banks and developers alike will seek to avoid overbuilding. To their credit, Bertolet and Durning identify the critical role of banks and lenders play in housing development but they fail to see the limits this places on using supply alone to drive down prices. When supply approaches demand and housing price flatten or fall, capital gets scarce for new projects. Thus even if builders wanted to double production, each prospective project’s pro-forma has to pencil out for the loan to be forthcoming and banks would be loath to risk overbuilding and hastening a drop in prices. Scarcity is what drives the market. So, we can build more than we’re building now, but banks are going to get shy at a certain point.

Despite taking a different path to get there, Sightline ended up at the same place as us: supporting Seattle’s inclusionary zoning program. They put the case for MHA very nicely in their conclusion so I’ll share that here:

Fortunately, balancing the costs of inclusionary zoning—especially with upzones, as Seattle proposes to do—can realize IZ’s promise: more market-rate housing, more affordable housing, more integration of neighborhoods by class, more choice for families and individuals, slower housing price increases for everyone, more density, more walkability, less climate change.

That’s a future worth imagining—and fighting for.

Let’s pass Seattle’s inclusionary zoning by enacting the requisite upzones, and let’s choose the biggest upzones (M2) wherever possible to get the highest affordability requirement and generate the most housing possible. Additionally, let’s focus on expanding the program to all of Seattle, including single-family residential zones, rather than spending our time speculating and inflating anxieties about setting the mandate too high. Seattle is on the right path; let’s not jeopardize our progress now with simplistic thought experiments and second guessing.

 


Appendix A – Land Value Capture

Sightline did take the time to call our argument for land value capture “critically flawed” so we should take the time to respond.

Because supply is inelastic, the argument continues, when developers bid less for land, landowners have no choice but to sell at the reduced price. Landowners are forced to eat those losses, and sales for housing construction proceed unimpeded. For example, the Seattle-based Urbanist  blog made this argument (here, here and here) in support of an all-fee form of un-offset IZ called a “linkage fee.”  But this reasoning is critically flawed: it erroneously assumes that a targeted fee on development works like a “land value tax” (see Appendix A-2 for background).

…Under a land value tax, all landowners pay a uniform rate, and they cannot avoid it. IZ, in contrast, takes effect only when new housing is built. The property owner can avoid IZ’s mandates entirely (or its in-lieu fees) simply by not building anything at all. IZ without offsets is, in short, a disincentive to build.

The rhetorical trick employed here is agreeing the supply of land is inelastic but then describing a situation of elastic supply when prices are affected by mandates like linkage fees and “un-offset IZ.” Apparently land goes back to being elastic when scared by a stiff enough fee. Now I would agree a land value tax is good and likely an even better solution than inclusionary zoning if it creates even more affordable units and similarly puts them in the highest amenity neighborhoods. Unfortunately that isn’t the decision before us, nor does a land value tax appear to be just around the corner. Sightline is right you can’t capture more value than the land holds, but they’ve shown no hard evidence that a 10 percent IZ requirement is past that tipping point.

High Time For High-Rise: Reduced Rezones Do Not Reduce Displacement

 

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Doug Trumm is the Publication Director at The Urbanist. He joined the exodus to Seattle in 2014, leaving behind his home state of Minnesota. Living on disputed land between Wallingford and Fremont, he is doing his best to improve both neighborhoods. He is a grad student at the Evans School of Public Policy and Governance and a marketing intern at King County Metro. His views are his own and do not represent his employer.

19 COMMENTS

  1. I’m not going to write a full point-by-point criticism of this analysis, as I think we all criticize each other to our collective detriment (we’re all on the same side here: making housing more affordable, and enough inward attacks does not help us collectively). But I do want to discuss your point:

    “Overestimated the power of upzones to help low-income households in the short term” Your argument here differs fundamentally with my view of reality. The way I see things, the cheapest rent is set by the ability of the poorest renter to pay this rent. Pretend we line everyone up by income, and put a label on this renter: MR (the marginal renter). MR is competing with the person behind them with a little less money that also wants to live in the city. Assuming a stable vacancy rate, any additional homes built at whatever quality level increases the number of people that can afford to live in the city, moving this MR label to that person with a bit less money. Adding 200 units to the market lets 200 more households in, moving this marker further down the line.

    Now, we can debate land values, how much wealth can be transferred from land owners, and the right percentage of subsidized and rent-controlled units. But what I really care about is how far we can move this marker, i.e. how many actual units we can build. Can you claim that IZ will give us more units? I think the only way you can is by connecting it to upzones. But upzones alone would arguably give us more units.

    As a side note, I’d like you to defend the term “in the short term”. It’s not clear how IZ would move this marker any faster than just an upzone. This shuffling of where the MR marker is happens immediately and continuously.

    • To your moving the market down the line marginal renter idea: there is truth in it but the problem is where the line is already drawn: it’s already beyond low income households who don’t get housing subsidies (and some who do) and hovering somewhere around in moderate income levels. If you make minimum wage or somewhere around 30k, 30% of your monthly income is $750. Know anyone apartments going for that in the market? Well maybe microunits could conceivably solve that for some individuals, and we should encourage that. But what about for families? We can just say we will slowly work that marginal renter toward low income households over the course of a decade. IMHO, we have to provide housing to low income households as soon as possible.

      The short term part, yeah you’re right it’s going to take a few years for projects to open but then we’ll know 5 to 11% of units will immediately be affordable at 60% AMI and help the bottom scale earner. How can we guarantee that with upzones alone? If so many people are being locked out of Seattle by the housing shortage, then it’s quite possible the new units will be sopped up by this pent up demand rather than help residents just below the marginal renter.

      • I think it’s noble and serves a social good to give people a home that otherwise wouldn’t afford one in Seattle. But if you end up with net fewer homes, you’re just pushing that MR renter out. You’ll never displace the rich people at the front of the line, only those at the back that are struggling to make rent.

        The only way to let more people afford housing is to build more housing, and I judge every idea against that goal. That’s why I’m strongly for increasing building capacity as well as increasing our property tax based subsidized housing. I could possibly support MIZ as a political solution that will end up with more housing by convincing the city to upzone. But I’m very skeptical that it would be a net improvement on its own merits. It seems to just juggle the line a little, finding some people a home while pushing other poor people out of homes. I’d be happy to be convinced otherwise, but without a claim that it creates more housing compared to simply upzoning I’ll remain skeptical.

  2. Seattle has more of demand problem than supply problem. Same argument as “adding more roads just gets filled up with cars”, Transits “induced demand” argument. Rental market is not a perfect market. People who can afford to pay more still snatch up the lower priced units because they are a bargain. Seattle is increasing the # of residents with higher incomes who rent out high, moderate, and lower priced units. Seattle’s supply of new rentals are mainly market rate, moderate or high rent units. Upzones will increase the # of market rate units and drive up the average rate. Who gets squeezed out? Lower income families. City is not really helping out the large # of people who cannot afford in-city, higher rent units. Developers cannot build low rent units and make any money. They will not build developments to lose money.

        • But it’s still one unit – we have a 4BR house rather than a 2BR house “because we can,” but we don’t occupy 2 houses!

          (The only “multiple unit” scenario I can think of is NYC, where people with sufficient money (ie a whole lot) will sometimes renovate 2 or more apartments into one – and I think that’s a reflection of the fact that the default size of homes in NYC is so relatively small compared to most places.)

      • Not really, if car travel if better than transit, people will opt out of transit and drive. Transit just doesn’t work for a lot of people.

      • I’d say gentrification can induce local demand, but at a total regional level that doesn’t make sense. Building pricey housing can explain why a specific neighborhood is more expensive, but that doesn’t explain why the region is more expensive.

        Pickoven is right – as the cost of housing decreases, people will consume more housing. But’s that’s Supply & Demand, not induced demand. Housing is not a luxury good – demand doesn’t go up because prices go up. [Prices will go up because prices go up because of investment in housing, but that’s separate from demand for actual housing units]

    • >> Developers cannot build low rent units and make any money.

      Nope, those are illegal. Apodments are illegal. In most neighborhoods you can’t add an apartment, or convert a house to an apartment, or otherwise increase density without jumping through a ridiculous set of hoops.

      The “rich people are kicking out the poor people” is just a myth. If it wasn’t, then why bother to have such restrictive zoning. Here is a simple example, from my neighborhood: An old house on a huge lot got torn down. They put up three giant houses, each one going for roughly a million dollars. There is plenty of extra space between them. They could easily build nine big houses, or probably a dozen row houses. Sell the houses for $350,000 and the developer makes way more profit. Sell the row houses for $250,000 and the developer makes even more. But again, it is illegal. So the developers do what they have done in most of Seattle — build as many units as the law allows. That is why housing is expensive.

  3. I don’t think I follow your argument on the inelastic supply of land—Sightline’s perspective seems like the right one.

    You’re correct that people overestimate the degree to which additional demands on new development directly increase rents for the residents of those new homes. The fact is, developers can only charge what the market will bear, so additional costs will often be borne by the property owner. That’s the whole idea of residual land value.

    But you can’t just keep adding requirements indefinitely, because property owners don’t HAVE to sell their properties. Almost by definition, if they haven’t sold by now, they’re not going to sell 5 years from now when a bunch of new mandates have been added that make their property worth even less. Presumably the reason they haven’t sold is because they’re covering costs right now, so they can sit on it as long as they need to. If the property owner can hold out until the housing shortage prompts a rebound in housing prices, that’s probably what they’ll do. That’s bad for everyone, since it means less total development.

    Whether it means less development of affordable units specifically is up for debate—that’ll depend on the total reduction in development—but this is why setting the price is so important. If you get it wrong, the upzones increase value by a smaller amount than the mandates decrease it, and you end up with property owners who are even less motivated to sell than they are today.

    • No one is suggesting that requirements which add costs can be added indefinitely. Suggesting that the cost of the development can hypothetically be greater than the value of the development is a different argument than suggesting that the existing value already in the land can be captured without affecting supply. The latter argument is probably still up for debate and the conclusions could be complex (perhaps in the short run in hurts development while prices adjust but in the long run we get the same amount?).

      Most people contributing to The Urbanist are strong supporters of reducing regulations that don’t really add public value. Reducing these specific regulations adds value to land which can be captured for public benefit.

  4. I feel like upzones are the main thing that’s going to keep housing prices under control. The “affordable housing” policy or MHA or IZ or whatever is really just a feel good measure to help sell the upzones. Probably it would work better without it, but I think it’s an acceptable compromise if it makes it easier to rezone.

    Two things will happen in the near future:
    1. Sometime in the next few years there will be another recession.
    2. Lots of baby boomers are retiring now, but 2020 to 2030 will see a massive wave of retirement. Many of these people will sell their large family homes and downsize in order to pay for their retirement.

    Both of those events pull back on demand for housing. As long as we keep building in the meantime, we will have a surplus. Seattle could be quite cheap in the 2020’s.

    • I think the main argument here is about who has a right to the city? Is it just about “prices under control” or is it about helping folks find adequate housing who are already marginalized in our society. Rezoning all single family zones should have been the first step of HALA not the first step that was stripped away. #REZONESEATTLE #REZONEMONTLAKE #REZONEBROADMOOR

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