Much like the argument against rent control, attempting to control home prices to generate more affordable housing can have just the opposite effect -- the supply drops and prices rise -- and not just on affordable housing.

So-called "inclusionary zoning" which allows new housing development only if builders set aside a percentage of new homes at below market pricing, hurts not only the affordable housing market, but the general housing market as well.

In 45 San Francisco Bay Area cities where inclusionary zoning was enacted to supply more affordable house, new housing construction dropped by 31 percent the year following the adoption of the policies. In 33 cities where there's data for 7 years both before and after inclusionary zoning was instituted, 10,662 fewer homes were produced during the 7 years after the adoption of inclusionary zoning, according to "Housing Supply and Affordability: Do Affordable Housing Mandates Work?" by the Reason Public Policy Institute, a Los Angeles-based public policy research firm.

The San Francisco Bay Area is one of the nation's most expensive housing markets, due largely to decades of inadequate housing inventories. Land shortages and financing and insurance costs contribute to the shortage. Price pressure is exacerbated by demand from a fast-growing population swelled by foreign immigrants and US emigrants. Newcomers seek the region's diverse cultures and geography, temperate climates, an abundance of entertainment attractions and leisure destinations, and opportunities in jobs and education.

Price pressure is also cyclical -- whenever the area's economy booms and draws workers like moths to a flame.

Inclusionary zoning appears to make matters worse. Reason's report says that since inception, affordable housing mandates have driven up home prices by $22,000 to $44,000, but as high as $100,000 in some more affluent cities including Cupertino, Palo Alto, Los Altos, Tiburon and Portola Valley.

Affordable housing plans begin with good intentions to help house those with smaller incomes, but other communities should think twice about the approach, the report says.

"Inclusionary zoning should only be enacted if the goal is to make housing more expensive and decrease the quantity of new housing," said Benjamin Powell, an assistant professor of economics at San Jose State University, and co-author of the Reason report.

Powell last year penned "'Affordable' Housing Laws Make Homes More Expensive" for the American Institute of Economic Research. "Such policies hurt home buyers and will price out most low-income families," he added.

Adrian Moore, vice president of research at Reason and the study's project director said, "These affordable housing mandates started with good intentions, but are producing terrible results. Inclusionary zoning backfired in the Bay Area and it will fail most everywhere else."

The typical city, after passing an inclusionary zoning ordinance, has managed to produce an average of just 15 units of affordable housing per year. At its current pace, it will take 100 years for inclusionary zoning to meet the Bay Area’s current 5-year housing needs, the report said.

Builders already struggling to compete are reluctant to build for less than a fair market profit and land owners likewise want full value, says the report, citing the reasons behind higher prices and fewer homes.

Home price controls' domino effect also siphons tax revenues. Lower home prices mean lower assessed values, costing state and local governments lost tax revenues. Inclusionary zoning also puts a lid on resale values for a number of years, further reducing tax revenues. Reason estimates Bay Area cities are out $553 million in tax revenues due to home price controls.

"By artificially lowering the value of homes in those 33 cities, $6.5 billion worth of housing was essentially destroyed," the report says.

"Considering that over 30 years inclusionary zoning has only yielded 6,836 affordable units, one must question whether those units are worth the cost in terms of fewer and higher-priced homes," the report says.

Finding ways to allow more true market value home construction is a better approach to affordable housing, Reason reports.

"When the supply of homes increases, existing homeowners often upgrade to the newly constructed homes. This frees up their prior homes for other families with lower incomes. Inclusionary zoning restricts this upgrade process by slowing or eliminating new construction. With fewer new homes available, middle- and upper-income families bid up the price of the existing stock of homes, thus making housing less affordable for everyone," the report says.

Published: April 28, 2004

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.