Another problem is that tying affordable housing to high-end market rate development risks giving city leaders an incentive to prefer high-end market rate development over approaches (like widespread incremental development) that might lower the costs and spread the benefits of new construction more broadly. I recently gave a presentation to a group of affordable housing advocates from a smaller city in Northern California, and was asked a question about inclusionary zoning. I didn’t condemn it categorically, but I pointed out the “crystal ball” problem, with Portland as a cautionary tale.
They responded, in effect, “Well, okay, but right now, the only affordable housing units we get at all are the ones built through this policy. We can’t afford to give that up.”
In this case, doubling down on inclusionary zoning as a tool meant having an incentive to court the kind of high-end development projects to which it’s possible to attach a bunch of inclusionary requirements and/or other community concessions. In the worst cases, it means being okay with an oligopoly in your development market: a status quo in which only a few big developers who do big, expensive buildings can hire the best lawyers and navigate a convoluted set of requirements and delays, and smaller builders (who cannot practically be subjected to most mandatory inclusionary requirements) are at a crippling disadvantage.
But you won’t solve housing affordability in any scalable way if the primary way you get your affordable homes is by skimming off the top of an overheated market, and if that mechanism collapses as soon as the market is less hot.
Another major source of affordable new homes also has this problem: the Low-Income Housing Tax Credit (LIHTC), a federal program which reimburses investors on their tax bill (such as corporations and pension funds) for financing the production of housing earmarked for low-income residents and below-market rents. LIHTC produces the majority of dedicated affordable housing in the U.S. The problem is that it works best when the market is fairly strong: that’s when it’s easiest to finance and build new projects. In other words, it’s pro-cyclical.
But the need for affordable housing doesn’t go away when the market cools or crashes; in fact, that need gets more acute, because more people are out of work or in precarious situations. After the 2008 crash, companies experienced heavy losses, and demand for low-income housing tax credits cratered. As a result, just as the housing crisis was most dire, and many foreclosed homeowners were beginning to enter the rental market, the nature of this funding mechanism temporarily kneecapped the ability of affordable-housing developers to create more of their product.
Overwhelmingly, our mechanisms for producing affordable housing depend on the very market conditions that make housing unaffordable for the majority. That is untenable.
It’s worth noting that this is not just a housing issue. This is a general issue with intervening in a dysfunctional system to do short-term good, not to overhaul that system or fix the underlying dysfunction. There are parallels in transportation policy, for example: this week, Chuck Marohn wrote about the habit of bike/walk/transit advocates of supporting huge highway spending bills in order to collect the table scraps for their priorities. There are parallels in economic development, too, where cities get sucked into an arms race of subsidizing bad deals with monster companies in order to secure some new development (and jobs) now, at the expense of their local economic ecosystems in the long run.
Harness the dysfunction to get a little of what we want, instead of fixing the dysfunction. It’s in the realm of housing where we see this most dramatically, trapping expensive cities in a vicious political cycle. As the conditions causing housing scarcity are exacerbated, the need for affordable housing becomes more and more urgent, and the politics around it get more and more zero-sum and strident. The end point of this is coastal California, where in some high-cost cities, any new residential building that’s not comprised of 100% subsidized affordable units is politically anathema to many advocates and local electeds.