Inclusionary zoning and housing affordability
First, a few definitions.
Inclusionary zoning (IZ) is the framework through which a municipality might require that a certain number of units in a new housing development be priced below the market rate.
Housing affordability, as I think about it, is the ability to afford housing. That sounds simple enough but most people don’t think about it that way. They might, for example, describe a new condominium building as being unaffordable, even though every unit will house a household that can afford it.
By that definition, more housing = more affordable housing, as there is more housing available for people to afford. I might have to expand on this idea in a separate post.
In any case, I used to think that IZ mandates, if applied evenly across a whole city, would have a minimal effect on housing affordability as the incidence would fall primarily on land owners.
That is, a land owner who was able to command $200 per buildable square foot (pbsf) for their land pre-IZ might have to discount it to $190 pbsf post-IZ, or something like that. The purchasing developer would have landed on that discounted residual land value when running their pro forma with the new IZ requirement.
No big deal. Toronto land owners are not far removed from lottery winners.
I now understand that to not be the full picture.
Sticking with Toronto as an example, there are sites in large swathes of the city that are undevelopable even with free land. A big reason for that is that major construction cost categories are the ~same whether you’re building a condo in the inner suburbs that will trade for $800 psf or a condo in Yorkville that will trade for $1,400 psf.
Land can not be cheap enough to bridge that gap.
What IZ and other costly regulatory requirements do is act to expand that undevelopable area. And that means less development, and less housing supply, and worsened affordability.