IS INCLUSIONARY ZONING THE SILVER BULLET NEEDED TO SOLVE THE HOUSING CRISES?

In 1976, the CN Tower became the world’s tallest freestanding structure, Canada became the first country ever to host an Olympic Games and not win a gold medal, Steve Jobs started a small computer company named after his favourite fruit, and the average house in Toronto cost $64,000.  Many things have changed since then, but most notably the average house in Toronto according to the Toronto Real Estate Board is now $1.2 million, representing an increase of almost 19 times. At the same time, the average family income has grown by only about 6 times over this same period.

The reasons for the widening gap between shelter cost and income are largely the result of housing supply not keeping up with demand, which has largely been fueled by immigration which historically has gravitated to major urban areas. In recent years, increased immigration has allowed smaller communities to see new growth after many years of flat or declining population.

The finger pointing, however, seems to be on the supply side.  The number of issues cited for the constrained supply could fill the pages of the 1976 Toronto phone book, or in today’s vernacular hundreds of pages of a Google search. Some of these include complex and laborious planning regulations; rising construction costs; construction labour shortages; tighter restrictions on urban sprawl; NIMBYism; municipal staff shortages; excess profit taking; and more, some of which are more valid than others. Inclusionary Zoning (IZ) seeks to partially address this problem by requiring developers to set aside a portion of new housing as “affordable”.


Inclusionary Zoning is not a New Concept
The earliest example of IZ was Montgomery County, Maryland, which was established in 1975. In Canada, Vancouver adopted IZ starting in 1988 and Montreal in 2005. IZ was first introduced in Ontario through Bill 7 on December 8, 2016, which amended the Planning Act to permit municipalities to create IZ official plan policies and zoning by-laws. Since then, there have been several changes to IZ in Ontario: Regulation 232/18 was filed in 2018, Bill 108 received royal assent in 2019, and Bill 23 received royal assent in 2022. There is also currently a proposed amendment to Ontario Regulation 232/18 which is not yet in force. To date, the City of Toronto is the only municipality that has implemented an inclusionary zoning policy, though other Ontario municipalities are in the process of studying IZ options. With such rapid legislative changes, it can be challenging for municipalities to keep pace with Ontario provincial requirements. Currently, IZ may only be applied within Protected Major Transit Station Areas (PMTSAs) and Development Permit System areas and only to developments with 10 or more residential units. Municipalities must conduct an assessment report to implement IZ, after which they may add IZ policies to their official plan and pass an IZ by-law implementing those policies. Municipalities are then required to report on the status of IZ affordable units every two years.

The proposed amendment to Ontario Regulation 232/18 would limit the affordable housing set-aside rate in IZ policies to 5% and set a maximum period of affordability to 25 years. The depth of affordability would also have a lower limit of 80% of average market rent or 80% of average purchase price for rental and ownership respectively. However, it is not clear whether these requirements will change before this amendment comes into force.
 
Inclusionary Zoning is not a Silver Bullet
IZ is not a silver bullet to solving the housing affordability crisis, but it can be an important tool to address shorter-term affordability challenges for specific populations. There are now over 880 jurisdictions in the US and more worldwide that have adopted IZ. No solid evidence exists that these policies have significantly contributed to resolving the broader housing affordability challenges in these jurisdictions.[1] Importantly, in many jurisdictions, rents can exceed 30% of income even for professionals making above-median levels of income,[2] which is not the ideal segment to target for IZ. However, if implemented properly alongside other policies promoting broader housing affordability, IZ can help protect more vulnerable populations especially during the transition process. Still, IZ only benefits those who are fortunate to receive an affordable home, so its benefits are limited by the number of affordable homes produced.

The evidence suggests affordable housing creation through IZ is dependent on how the policy is implemented, although production is modest even in the best-case scenarios. Montgomery County, Maryland has one of the most successful IZ policies.[3] From 1976 to 2022, Montgomery County’s IZ policy produced 16,703 affordable homes, for an average of 356 per year.[4] Irvine, California produced 4,861 affordable homes through its IZ program from 1975-2006.[5] Montreal’s IZ system, which started as a voluntary incentive-based program in 2005 and switched to mandatory in 2018, has produced 1,362 affordable homes as of 2022, alongside other programs that produced more social and affordable homes.[6] While some IZ policies have been moderately successful at producing affordable homes, others have produced fewer or almost no affordable homes, often due to local opposition to housing developments or overly-lax (voluntary) requirements.[7]
 
How Does IZ Affect the Housing Market?
Who the winners and losers are from IZ policy has been hotly debated. Some argue the effects of IZ would be fully capitalized in land values, thus not affecting developers or buyers/renters. In our opinion, this would be a surprising result since it is generally accepted that other planning and regulatory charges and property taxes do fall at least partially on developers and buyers/renters,[8]^{,[9],[10],[11]} and IZ applies only to large residential developments and not to the existing use or other developments. Theoretical analyses suggest IZ may reduce overall housing development and increase prices.[12]^,[13]

Unfortunately, there are few empirical studies examining the effects of inclusionary zoning on prices and construction in local housing markets, and several of these studies may have methodological limitations that affect the conclusiveness of their results. There are four main studies that have used an empirical approach that plausibly isolates the causal effect of IZ policies. [14] These analyses suggest IZ may cause a slight increase in overall housing prices on average assuming the policy is not too burdensome, although there is some conflicting evidence.[15]^{,[16],[17],[18]} Importantly, extremely recent advances in econometric theory found the methodology used in many of these studies is likely biased, meaning they may have underestimated or overestimated the true effect of IZ.[19] More empirical research on IZ would be most welcome.

A pair of more recent studies examine development behaviour following the implementation of an IZ policy. In the UK, the expansion of IZ in 2008 to cover developments of 10-14 units reduced developments of that size while increasing developments of 9 or fewer homes, which roughly offset to leave the total number of new units unchanged.[20] Another recent study examined development behaviour following the enactment of IZ in Seattle between 2017-2019 and found developers shifted projects away from plots where IZ applied, to nearby parcels where the IZ regulations did not apply, although total construction again did not change.[21] These studies suggest the enactment of IZ may cause a substitution towards built forms and locations where IZ does not apply. This research suggests that in the case of Ontario, there is a risk that current IZ policies may reduce the attractiveness of PMTSAs for residential development in favour of other locations which avoid IZ regulations.

Does IZ Contribute to Housing Inclusivity?
Studies seem to suggest that the degree of socio-economic mixing depends on the design of the IZ policy. Jurisdictions where IZ is implemented with more regional-level authority and less local discretion can more equitably disperse affordable housing. On the other hand, local jurisdictions with a high degree of political autonomy can be pressured to use their authority to block equitable dispersion of affordable housing.[22]^,[23]

IZ is Only One Tool in a Planner’s Toolkit
IZ is not the panacea to solve Ontario’s housing challenges, but it can help some lower-income households while the broader housing affordability crisis is being addressed and help facilitate mixed-income neighbourhoods.

Based on market feasibility studies, high set-aside requirements or otherwise stringent IZ policies may render some residential developments infeasible. IZ is also not feasible for every site and is also more demanding for purpose-built rental developments which are economically challenged even without IZ. Because Ontario’s IZ policies mostly apply to prime land near transit stations, however, the added value created by transit may, in some cases, offset the additional costs of IZ.
It is clear that other programs, including incentives and both private and public investment are required to fully address the current housing crises.
By 2070, who knows if the CN Tower, Apple Computers or the Olympics will still be a thing, but if housing prices continue to rise at the same rate as in the past 47 years, the average home in Toronto will cost over 22 million dollars.

IZ can only provide for a very small portion of the need for affordable housing.  A broader strategy involving a united effort from all levels of government and the private sector is ultimately needed to address housing affordability.