The Problem with Inclusionary Zoning

Recently, New York City Mayor Bill de Blasio hired a San Francisco consulting firm, Bay Area Economics (BAE), to select neighborhoods for mandatory inclusionary zoning in conjunction with a new NYC program. In an article about the program, Crain’s New York says it will, “eventually give developers the opportunity to build taller buildings in certain neighborhoods only if they set aside a percentage of the apartments for affordable housing and do so without using any subsidies.”

What they mean is that the city has constrained the floor-area ratio (FAR) so much and the land price is so inflated that developers would not be able to profitably build even luxury housing under current FAR restrictions. If they could, they would not need to bother with inclusionary zoning. However, because developers will get additional FAR in exchange for adding some affordable housing units, new building construction may become worthwhile.

Two things are clear:

1.  The city has been arbitrarily constraining the FAR everywhere. They have not justified this policy by claiming that there are negative externalities to building height. In fact, they are perfectly willing to increase FAR by whatever is necessary to make the project viable.

2. The supply of new “affordable housing” will always be a fraction (about 20%) of the new market supply of housing for people above the 80th income percentile, assuming this is the income range that can cross-subsidize affordable housing. The new supply of affordable housing will then be 20% of 20% = 4%. Potential beneficiaries for affordable housing are between the 20th and 55th income percentile. Then, assuming the demand for new housing units is proportional along the income distributions, demand will be 35% compared with affordable housing supply of 4%.

The very possibility of making inclusionary zoning dependent on an increase in regulatory FAR is an indictment of the city planning policy. Ad absurdum, one could argue that decreasing the current FAR across the city would make land even more expensive. Under this policy, extra FAR grants would then be more valuable to developers and therefore increase the likelihood that more developers would be willing to build affordable units in exchange for higher FAR.

Inclusionary zoning may be politically necessary as it has a nice Robin Hood image that mayors find hard to resist. However, it will have little effect on the overall market if the supply for new affordable housing is limited to 20% of the new supply of luxury apartments.

The solution is obvious: increase the FAR in every part of the city for which a clear negative externality has not been identified. This will allow developers to add new units in large areas of the city. Start by allowing micro apartments everywhere and increase all FAR by 25%. Will people resist any change in current FAR? If so, the city will have the expensive housing it deserves.