Tradeoffs and Spillovers in Affordable Housing

• In Event: Using New Sources of Data to Study the Relationships between Housing Affordability, Location, and Inequality

Abstract

Policymakers in many cities face a dual challenge: housing affordability and supply shortages. In response, inclusionary zoning (IZ) policies offer subsidies to encourage the integration of income-restricted units into market-rate developments, now the most common form of affordable housing provision in the United States. We study Seattle's Multi-Family Tax Exemption (MFTE) program, a long-running voluntary IZ program that grants developers a 12-year property tax exemption in exchange for setting aside 20–25% of units as rent-restricted, showing how these policies change where housing is built and the effects of development on these neighborhoods. Although program requirements are uniform citywide, differences in local conditions lead to varied responses from developers and landlords. We document a trade-off: in higher-income neighborhoods, rent discounts for subsidized units are larger, but developer participation is more sensitive to reductions in policy generosity, constraining affordable housing production to lower-cost areas when requirements tighten. Using granular Craigslist rental data and a spatial difference-in-differences design, we show that IZ lowers nearby rents in lower-income areas but raises them in high-income areas, consistent with direct competition for lower-income tenants in the former and building-driven neighborhood amenity changes in the latter. These heterogeneous spillovers are robust to both alternative specifications comparing sites with completed buildings to sites with buildings completed later or withdrawn from the program. They contrast with prior findings on the Low-Income Housing Tax Credit and reflect MFTE's flexibility and endogenous developer-driven choices. To interpret these patterns, we develop a quantitative urban model with endogenous developer choices between market-rate, IZ, and non-participation options, as well as rationed affordable housing allocated to low-skilled households. This framework enables us to evaluate counterfactual policy designs and quantify welfare effects across household types. Voluntary IZ programs can expand access to high-quality housing and higher-opportunity neighborhoods for lower-income residents but may also contribute to gentrification in wealthier areas, resulting in mixed welfare effects.

Author

• Eric Suyuan Wang, University of Washington
  Presenting Author