Inclusionary Zoning and Housing Supply: Evidence from California's Palmer Fix

• In Event: Production and Provision: New Evidence on Federal, State, and Local Housing Policies

Abstract

Inclusionary Zoning ordinances require developers to set aside a share of new units at affordable rates to low/moderate income tenants. In California, more than a third of localities have adopted an ordinance, with the number of associated affordable units rivaling those of the largest federal housing policies in the state. These ordinances act as taxes on construction, and may reduce the overall amount of rental housing produced. However, existing evidence on Inclusionary Zoning's supply effects has been mixed. Inclusionary Zoning is difficult to study because local ordinances are highly heterogeneous and there was, until now, a lack of high quality data on their key attributes.

I estimate the effect of inclusionary zoning ordinances on housing supply using novel administrative data on all California cities. I leverage a statewide change in preempting law for identification. I find inclusionary zoning ordinances significantly reduce the flow of new housing supply, quantifying the trade off between affordable unit production and market rate production.

I have assembled a novel panel of California localities' inclusionary housing policies using administrative reports. Through public records requests and some archival work, I have acquired over 2000 records from about 500 California localities, dating from the mid 90s through the present. From these, a measure of policy stringency is constructed which captures what share of future rents landlords must give up to comply with the policy. This is the implicit tax of inclusionary zoning. The new measures allows me to estimate the intensive margin of inclusionary zoning's effect on housing supply.

I then perform a difference-in-difference estimation around a recent change in California policy. Inclusionary zoning was found to be an illegal form of rent control in Palmer v. LA (2009). The case abruptly halted the enforcement of local policies on the books. Policies remained dormant until a "Palmer Fix" was signed into law in 2017, reactivating all local inclusionary zoning ordinances. This allows causal identification of the effects of the ordinances using a difference-in-difference strategy around the reactivation date.

Results show that for each 1 percentage point of implicit tax on rents, the flow of new housing is reduced 7.6%. This implies that the typical inclusionary zoning ordinance reduces annual new residential construction by 31.8%. Additionally, I find the policies relocate multi-family developments within jurisdictions to lower rent areas, where the policy is effectively less severe. Accounting for the stringency of policies turns out to be critical. Heterogeneous effects by policy stringency may explain divergent results in the prior literature. I discuss implications for welfare, evaluating the trade off between subsidized rents, access to high income neighborhoods, and reduced market rate housing supply for low income tenants.

Author

• Noah A Kouchekinia, University of California Irvine
  Presenting Author