Denver’s urban-growth boundary has made housing expensive. More than a decade ago, the city blamed “failure by the private market to produce enough affordable housing” (see p. 5). To fix this “failure,” the city required developers to build “affordable housing.” Now, the city admits that this ordinance is a failure.
Data from the 2011 American Community Survey indicates that the median value of owner-occupied homes in Denver is nearly four times median family incomes. It should be just two times, which is typical for cities that don’t have urban-growth boundaries or other restrictive land-use laws. So housing prices are nearly twice as high as they ought to be.
As this city document explains, Denver’s “inclusionary zoning” ordinance requires developers who build 30 or more homes or condos at one time to sell at least 10 percent of those homes at “affordable” prices. Typically, this means an average of about $40,000 less than market prices, which is likely below the actual cost of constructing the homes. To make up for the losses, developers have to sell the remaining 90 percent for more than they would otherwise.
The people who buy these homes don’t really get a windfall. They are required to live in the houses themselves (i.e., they can’t rent them out at market rates) and, if they sell them within 15 to 30 years after buying them, they can’t sell them for more than they paid for them plus inflation. None of the buyers are really poor; anyone who earns up to 80 percent of the city’s median income is eligible. It is likely that many of the buyers are young people whose lifetime earnings are likely to be well above median incomes.
The number of “affordable” homes that were built under this ordinance is pathetic. About 55 units were build in 2007, but the average for every other year since 2005 has only been about five units per year. That’s a total of about 100.
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The city claims that more than 1,100 units were built under the ordinance, but it is counting 1,056 units built as a part of city-subsidized developments such as Stapleton and Lowry (former airports converted, at city expense, to “New Urbanist” housing projects). Most were built in Green Valley Ranch, a development east of Denver on land annexed into the city. Developers received incentives to make about 650 homes “affordable.”
Where did the city get the money to offer these incentives to Green Valley developers? From other developers who paid the city millions to opt out of the inclusionary zoning program. Ultimately, of course, those millions were paid by new homebuyers, which means the inclusionary zoning ordinance actually increased the cost of new housing. Since the prices of used homes follow new home prices, the affordable housing ordinance made Denver housing less affordable.
This is not surprising: economists at San Jose State University proved this is what happened to cities that adopted inclusionary zoning ordinances in California. They noted that not only did such ordinances drive up the cost of new homes, they led developers to build fewer new homes than they would otherwise.
Although the city admits that the ordinance has failed, it uses the wrong measure for success. Instead of counting the number of “affordable” units built, it should look at the overall affordability of the city’s housing. The 2010 census found that Denver has more than 263,000 occupied housing units, so adding a few hundred “affordable” units to the mix is really not going to make any difference. The real problem is that the ordinance makes all the rest of the housing even less affordable.
Denver’s likely solution is to make the ordinance even stronger by increasing the percentage of affordable homes that must be built, reducing the minimum number of homes that triggers the ordinance to less than 30, or taking away developers’ ability to opt out by paying the city money. This will simply make the problem worse. Instead, Denver should tell the Denver Regional Council of Governments to abandon the region’s urban-growth boundary and let people live where they like.
We need to stop worrying so much about affordable housing and focus on affordable cities. What makes cities expensive. Location, location, location. So there will always be a balance as to whats affordable and whats sacrificial, if the city gives you a better job, then maybe smaller living space is a small sacrifice. Affordable housing in cities has always been wishy washy endeavors. New York and San Francisco have very lengthy rent control laws, yet they’re the cities with some of the highest rents.
It is often a requirement that builders who create large new developments that they must include a certain amount of ‘affordable housing’. The idea is to ensure that more housing is created for those who are less well off. There may also be an idea that it is desirable in various ways to mix rich and poor together in the same localities. But as with many attempts to legislate good things, there are unintended consequences.
One reason is they will receive less money and therefore there are projects at the margin which cease to be attractive because of the cost of providing the affordable housing at below market value. As is often they are the first to fall into disrepair.
I’d just like to bring up something today off topic. The Detroit-area factory where Rosie the Riveter showed that a woman could do a “man’s work” by building World War II-era bombers, making her an enduring symbol of American female empowerment, will be demolished if money can’t be found to save it. I’m all for history but some ratty old factory warehouse. I can understand, sure saving the planes but do we really need to save the factory, it’s not even an impressive looking factory like the 19th century places that are protected. Since America is a young country we developed this mania for saving anything older than World War II. The destruction of Penn Station penned our interest in historic preservation and Main Street when Sherman Williams offered donations to repaint it. I’m all for history but we have the planes she built, we can save the tools she used, the clothes she wore. We don’t need millions spent on some rusting shack.
“…anyone who earns up to 80 percent of the city’s median income is eligible.”
If you are a believer in inclusionary zoning, this metric misses the mark by a long shot. For many “affordable housing” schemes, be it zoning, accreditation, or something else, standards like within 80% of median household income are used. In cities like Denver where the median household income is quite a bit higher than the national average, programs like these aren’t helping the people city officials want to help.
My take, if we really want to help poor people with housing we need to look at property tax valuation and help people from being priced (aka taxed) out of their neighborhoods. Let’s worry less about making new developments “affordable” and combat gentrification pressures in existing neighborhoods. We wouldn’t need as much new affordable housing if we keep lower income families from being priced out of their existing houses.
“Affordable housing in cities has always been wishy washy endeavors. New York and San Francisco have very lengthy rent control laws, yet they’re the cities with some of the highest rents.”
Isn’t the reason there are lengthy rent control laws in these cities because of the high rent and not the other way around?
Denver’s urban-growth boundary has made housing expensive.
Oh, wow! He said Denver and – chuckle – no really…urban growth boundary in the same sentence!
Randal, are you practicing for a Cracked-style magazine for AFP or Cato? Cuz that was funny.
What’s funnier – and you should write about – is the 67,000 page “new” zoning “update” that they call “form based” zoning. That’s a much better treasure trove.
DS
Isn’t the reason there are lengthy rent control laws in these cities because of the high rent and not the other way around?
That’s right – and they are two different animals.
But as we all know, rents are high because they are two of the world’s great cities, Great cities on this planet are in demand. Demand drives Ricardian rent, which is jiggered by equilibrium rents.
DS
“But as we all know, rents are high because they are two of the world’s great cities, Great cities on this planet are in demand. Demand drives Ricardian rent, which is jiggered by equilibrium rents.”
Indeed. Same for Seattle, which is geographically constrained so that any growth boundary is virtually meaningless. Businesses like Amazon are hiring and having to recruit people from China to fill positions. They in turn bid up housing. In think this is a temporary phenomenon as the Case-Shiller indicates bubble reinflation locally, and once our phony, unsustainable, debt-based-consumption economy again attempts to correct, housing prices will fall. Until then, as a teacher I can hardly afford to live in the neighborhood where I teach. Was looking this weekend to move a block from my school to a new development with appliances that actually work, but no way I can pay $2k for ~700 sq ft. And that price has zero to do with growth boundary.
San Jose economists document that you link to isn’t working http://screencast.com/t/SVhSySnXkS6