This month the U.S. Supreme Court will decide whether to hear a legal challenge to San Jose's controversial inclusionary housing ordinance. Enacted in 2010 and upheld by California's top court in June, this zoning law requires housing developers of 20 or more units to sell 15% of them at prices far below their market value or pay a six-figure fee instead.
More than 170 California communities impose similar mandates and set-asides, but the net effect isn't more affordable housing for all. Rather it is a reduction in the construction of new homes, which pushes prices upward.
This is hardly a solution to a housing affordability crisis. It's also an unconstitutional government taking of private property without just compensation, and a violation of several precedents specifically, which is why the San Jose case deserves consideration by the Supreme Court.
If you think affordable housing mandates can't do much harm in regions where home prices are already among the highest in the nation, think again. In a Reason Public Policy Institute study that investigated the impact of housing set-asides in the San Francisco Bay Area from 2003 to 2007, economists Benjamin Powell and Edward Stringham found that the volume of new home construction dropped on average 30% in the first year after such a law passed, and prices rose 8%.
In a study looking at Southern California, Stringham and Powell found that housing starts in eight cities dropped off significantly after the inclusionary zoning went into effect. In the seven years before the law, over 28,000 new homes were built. In the seven years after? Only 11,000. Yes, 770 “affordable” units were constructed, but what's more important is the 17,000 homes that weren't built at all, making the housing shortage more acute and pushing up prices.
A different set of researchers from NYU's Furman Center for Real Estate and Public Policy found that inclusionary zoning programs in the Bay Area produced relatively few affordable units compared with other low-income housing policies. And their statistical analysis of California and Massachusetts laws found that inclusionary zoning laws “contribute to increased sales prices of existing single-family homes during rising regional markets, and may depress local housing prices when regional prices decline.”
An analogy reveals the foolishness of inclusionary zoning.
Suppose there was a law that if you opened a new supermarket you had to sell 15% of your groceries to low-income people at far-below market prices to improve their access to good nutrition. This would clearly be an unfair burden. Those wanting to open new supermarkets did nothing to cause the problem; on the contrary, they intended to increase food accessibility.
Those eligible to buy the cheap food would benefit. But if this regulatory “tax” led to fewer new markets, many more people would lose. To cover the cost of this forced charity, new supermarkets would charge higher prices for the remaining 85% of their groceries. Existing stores might, in turn, decide to raise their prices because the new stores would provide no price competition on most goods.
Our society recognizes the downstream consequences of forced charity policies when the product is food; that's why the food stamp program doesn't constrain suppliers or meddle with free-market rates. (Instead, it helps low-income consumers afford full-price goods.) We should notice the same consequences when the product is housing.
Perhaps the reason that inclusionary zoning mandates aren't more widely opposed is that they transfer so much wealth from real estate developers and homebuyers to people who already own property. The mandates are portrayed as compassionate, but they survive because they have the opposite of the supposed intention, resulting in higher home prices, not lower.
Ultimately, the most important reason for ending inclusionary zoning may not be economic, but simply moral. The blatant unfairness to developers — who are not a cause of the housing crunch, but are part of the solution — run counter to the rules of fair play enshrined in the 5th Amendment.
Let's hope that the Supreme Court will not just hear the challenge against San Jose's counterproductive housing ordinance, but will strike down such mandates across the nation. We should be building our way out of the housing crunch, not burying ourselves deeper under a rubble of self-deceptive policies.
Gary M. Galles is a professor of economics at Pepperdine University, a research fellow with the Independent Institute in Oakland and author of "Faulty Premises, Faulty Policies."