City Council is considering an "Inclusionary Zoning" (IZ) bill that would mandate that local developers provide one unit of "affordable" housing for every nine units of market-rate housing they build.
This is the wrong approach to take. Philadelphia's problem is not a lack of affordable housing, it is the large number of very poor households that cannot afford even modestly priced units, as well as a large housing stock that is dated, depreciated, and in substandard condition.
Recently, the nonpartisan Urban Land Institute (ULI) examined more than 500 U.S. municipalities with IZ mandates, which are overwhelmingly concentrated in California, Massachusetts, New Jersey, and the New York City area.
The overall higher level of prices (and incomes) in those areas better allows developers to absorb the costs of providing affordable units, which are typically constructed at a loss. Philadelphia's median house price is currently $160,000, compared with $509,600 in California, $378,900 in Massachusetts, $307,500 in New Jersey, and $426,300 in the New York metro area. Given Philadelphia's prices, it would be hard to make affordable housing construction work financially here.
The report also defines four conditions necessary for the successful implementation of IZ. Philadelphia fails on all four — and by a significant margin.
First, there must be robust market-rate development already occurring in the municipality, and it should be fairly steady over time. Obviously, if little new home building is occurring, mandating that a certain percent of it be affordable will not achieve much.
Philadelphia is currently building only two new homes for every 1,000 residents. This is well below the average in those other cities, and the pace is declining, which means few affordable units would be built even if the IZ bill is passed.
Second, IZ policies are much less likely to be successful in areas where the poverty rate is very high because IZ will impose extremely low rents and prices on newly completed housing. Philadelphia's poverty rate is the highest of any large city in the United States, at 25.7 percent. The average poverty rate in the major metro areas with IZ laws is 15.7 percent.
Third, IZ policies have been more successful in regions where a majority of local municipalities have adopted IZ policies. Why? Developers cannot escape a city's IZ requirement by simply relocating their project to the next-closest city that has no such requirement. If Philadelphia unilaterally implements IZ (and makes it mandatory), it would create a strong incentive to build housing in the suburbs rather than the city.
Last, IZ policies must be carefully crafted to avoid making a substantial amount of market-rate development unworkable. And that is a huge problem given that Philadelphia has the fourth-highest cost of construction in the nation. The industry's numbers overwhelmingly indicate that the bill being considered could greatly reduce future housing development in Philadelphia. Before any bill is passed, the supporters need to provide the data that show the projects are indeed financially practicable.
The most likely impact of this bill would be to worsen housing affordability in Philadelphia. By rendering the vast majority of new homebuilding projects in the city nonviable, IZ would reduce the growth in the city's future housing supply. As the existing housing stock depreciates without being replaced, rents and prices will rise even as the quality of homes declines. Philadelphia's households will end up living in housing that is more expensive yet in worse condition.
To truly improve housing outcomes in Philadelphia, we need to address both our high cost of construction and our high rate of poverty.
Lower development costs would increase the overall profit margin of housing development, and incentivize the construction and rehabilitation of units to more affordable levels of prices and rents.
Decreasing poverty and increasing incomes would better enable existing households to buy or rent.
Finally, as economists, the emphasis of the IZ bill's focus on new construction strikes us as extraordinarily inefficient. Because of Philadelphia's high construction costs, new housing development is skewed toward the upper segment of the market, where incomes can cover development expenses.
For what it costs to place a low-income family in a high-end luxury condo on Rittenhouse Square, the city could rehab about 30 row homes in West Philadelphia and help out a lot more people in the process.
We sincerely agree with the goals and intentions of the IZ bill's advocates. But the data indicate that not only will this bill fail to significantly increase the supply of affordable housing, it will decrease both housing affordability and quality in Philadelphia.
Instead of creating disincentives for developers, we need incentives to rehabilitate the large supply of lesser-quality housing. That would bring better and more affordable housing to many more Philadelphia households than the IZ mandate ever could.