Chicago is yet another example of a city where mandates to create affordable units have only made problems worse for renters and people trying to build more housing.
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Mandates by local governments to include units with lower rents in apartment projects don’t create more affordability for people that need housing. The scheme, mandatory inclusionary zoning, simply doesn’t work. The scheme, typically called mandatory inclusionary zoning (MIZ), relies on changes to the zoning code that require a percentage of new units created to be rented at a controlled price. Those developments can opt out of the requirement by paying a “fee,” what I’ve called a bribe, to avoid including the rent controlled units. Those funds end up being funneled to non-profit developers who build, expensive units, very slowly. The Illinois Policy Institute has published a review of the failure of Chicago’s MIZ scheme. It is worth reading.
The reason why inclusionary mandates aren’t effective should be obvious, especially to anyone who understands the basics of supply and demand. That understanding is not assumed among local elected officials or bureaucrats who often believe that prices aren’t set by demand for housing from consumers, but that prices are set by greedy developers who decide how much money they want to make then set prices.
On the contrary, prices are limited by what people can and will pay and what it costs to build a project. If project costs can’t be supported by what people can and will pay, a project doesn’t happen. Mandating inclusion lowers rents which can mean a project cannot recover costs unless, ironically, it raises rents in other units. A fee is similarly passed on to other renters, raising rents. If that increase is too much, a project won’t happen.
According to the report, over 20 years, Chicago’s version of the mandate for rent restricted units, the Affordable Requirements Ordinance, has suppressed supply. “Chicago granted permits for 1.36 units per 1,000 residents, while the other cities approved 4.71 per 1,000,” according to the report.
In Seattle, where the program has produced negative outcomes, the logic was fanciful: new housing is expensive, people can’t afford it, then government has subsidize more housing, so, therefore, we should make new development pay those costs. This approach does two things, first it adds costs across the housing economy, costs that have to be offset with higher rents – the opposite effect than what local governments say they intend. Second, these costs can limit new supply by making projects infeasible; when people are able to pay the higher rents, only then can new building be feasible. Again, this is the opposite of what a community needs.
I asked Joshua Bandoch who authored the study on mandatory inclusion in Chicago why he thinks these sorts of mandates are so enticing to local officials.
“It’s enticing because it’s subtle and hidden,” said Bandoch. “Rather than forcing landlords to keep rents at a certain price (or certain increases), IZ simply says, ‘If you want to build, here’s an added regulation.’ People don’t see everything that goes into getting approval to build, and all the properties not built.”
This is consistent with my decade of experience. By the time the measure is fully implemented, almost everyone has forgotten the debates about its effectiveness. The MIZ intervention becomes simply another housing program, even an entitlement that channels money into “affordable housing.” A very few projects are built with extorted funds, but the ribbon cuttings and press scratch the itch that politicians have for doing something about housing.
“The idea of using the rich to subsidize the poor is one that many politicians know sounds appealing (often through taxes),” Bandoch points out, “and that’s what inclusionary zoning seems to do.”
During my long a fruitless fight against MIZ in Seattle, I would often remind anyone who would listen that when the program started to fail, politicians wouldn’t scratch their heads, wonder why, do research, and then end the mandate. Instead, they’d decide the answer would be to expand the program with more requirements. Bandoch suggested that this is unique to Chicago.
“Every time the city has seen that one iteration of the ARO wasn’t working (2003, 2007, 2015), their response was to double down and tighten restrictions rather than remove them” Bandoch said. But in Seattle, this has happened as well. One very tentative study concluded that the mandate there, “is one of several factors that have negatively impacted development feasibility since 2019.”
Weirdly, once Councilmember, sort of intuitively knowing this demanded that the fees on new development be dialed up in her neighborhood. Even when the impacts are clear – suppressed housing supply – politicians can decide that developers are making too much money anyway and the idea that more supply ameliorates higher prices caused by scarcity isn’t a reality. Prices go up because profits go up.
The story of mandatory inclusion is the story of housing discourse in the United States, a narrative long on blame, short on common sense economic thinking, and an addiction to the fix of ribbon cuttings on big subsidized, affordable housing projects that not only do little to help address the problems of people struggling to pay the rent, but arguably, make the problem worse by building them at the expense of new development and other renters who pay the fees in the form of higher rent. This is a longer term and deeper problem with no solution in sight.