Like many cities in the US, Portland has been experiencing an affordable housing crisis as rents have risen substantially over the last several years. One proposed solution to this problem is inclusionary zoning—requiring people who build new apartments to hold some units’ rent at below-market rates.
In the coming month or so, the Oregon Legislature will consider a package of bills to address this problem. Unlike most states, Oregon law prohibits local governments from enacting inclusionary zoning laws. As a quid pro quo for agreeing to drop the ban—at least for rental housing—the development industry is suggesting it would like to see the state’s land use laws, including its signature urban growth boundary, weakened.
But this is a losing proposition on both ends. Busting the urban growth boundary will do nothing to address housing affordability, and inclusionary zoning would likely make the city’s affordability problems worse, not better. Here’s why:
- Affordability is about growing up, not out. The economic literature is very clear that the problem is primarily constraints on achieving higher levels of density within existing urban areas: i.e. building more multi-family housing. Rents are rising in Portland (and Seattle and San Francisco) because of the difficulty/constraint on building more density in the center, not expanding the periphery. More housing in the center makes better use of our existing, expensive infrastructure, and lowers transportation costs and pollution. Adding land at the urban edge does little to expand either the supply of housing or, more importantly, the supply of affordable housing. In the last 15 years, the Metro urban growth boundary (or UGB) has been expanded to add more than 32,000 acres of land. Since 2000, those UGB expansion areas have added only 8,500 new housing units, about 7% of new dwellings built since 2000.
- The market demand/affordability problem is in the urban core. That message is abundantly clear in the shift in home prices in Portland. All of the price appreciation in the Portland area is focused on the urban core. In 2005 that homes in Portland sold for a $20,000 discount to homes in the suburban counties. Now Portland homes sell for a $27,000 premium to homes in the suburbs. Adding more land on the periphery does very little to influence supply in the center, where the demand is.
- Adding more supply in the core is the key to addressing affordability. The solution to rising rents is to continue to aggressively expand the supply of housing, especially in the core in Portland. Build more apartments. Demand has shifted much more quickly than supply, and the development pipeline is long and slow, but as new units come on line, they help absorb the demand that is pushing up prices. In recent weeks, Seattle rents have begun to soften. Seattle is roughly a year or so ahead of us in the up-cycle in housing construction.
- Inclusionary zoning increases market prices. Inclusionary zoning tends to drive up the cost of market-rate units, especially in tight housing markets like Portland’s, since developers recoup the cost of subsidized units by raising prices elsewhere. On top of that, the inherently negotiated nature of inclusionary zoning approvals adds uncertainty and delay to the development approval process—which also drives up costs. There’s only limited experience with inclusionary zoning, but evidence from Boston, where it’s been in place for some time, suggests that inclusionary zoning will cause fewer total new units to get built, and that constriction in supply will tend to drive up prices in the entire market.
- Inclusionary zoning creates only token numbers of affordable units. In the five boroughs of New York, in one of the hottest real estate markets in the world, that city’s inclusionary zoning program produced fewer than 3,000 units in a decade. Portland subsidized nearly that many (about 2,300) affordable units in the Pearl District with Tax Increment Financing. So inclusionary zoning creates so few units that it ends up like a lottery: if you’re lucky enough to get a subsidized unit, bully for you. But everyone else probably ends up paying more for housing as a result.
- Inclusionary zoning requirements would encourage further sprawl. Because inclusionary zoning is likely to apply only to housing built in Portland, but not in suburban jurisditions, it will effectively be a way of penalizing and disincentivizing dense development in the city relative to housing on the periphery. It would effectively be a tax on urban development, but not suburban development—unless the inclusionary zoning requirement applies regionally and a exacts a payment-in-lieu from all new housing construction.
- If we want to make housing more affordable, let’s get rid of parking requirements. Oregon actually does allow inclusionary zoning—for cars, in the form of parking requirements. Requiring parking reduces the amount of land that can be used to house people, and directly drives up the price of new homes and apartments. These costs get passed on to homebuyers and renters. Studies show that in urban centers, parking requirements drive up rents by something on the order of about $200 a month. If we want to increase affordability we ought to be getting rid of this kind of hidden housing tax.
Housing affordability is a real problem, and it demands solutions that address the reality of today’s housing market. Sacrificing the state’s prudent system of planning for urban growth won’t remedy housing affordability.