Inclusivity requirements above 10% are likely to reduce the production of moderate-priced condominiums, which will reduce overall affordability.
Victoria City Council will decide on June 27th the “affordable” (also called inclusivity) requirements for new condominiums. Market studies indicate that the market can bear up to 10% inclusivity requirements. City council is currently considering a 20% requirement which will almost certainly reduce the total number of condos built in the city.
As discussed in a previous column, Inclusivity Requirements. What Maximizes Affordability Overall?, most of those eliminated will be lower-priced units because they are least profitable. A 20% inclusivity requirement means that, if each below-market unit requires $200,000 subsidy, each market-priced unit bears a $50,000 additional cost, which is feasible for a million dollar unit but spoils the business case for moderate-priced ($200,000-600,000) units.
Reducing moderate-priced housing development reduces affordability for both moderate-income households that can purchase the new units, and lower-income households who benefit from filtering, as some lower-priced housing occupants move into more expensive units, and over time as the new houses depreciate and become cheaper.
A recent study by economist Evan Mast, described in Daniel Herriges’s column, The Connectedness of Our Housing Ecosystem, used an innovative approach to measure the ultimate effects that building relatively expensive new units has on rents throughout a city. Mast tracked the moving history of residents at 802 new multifamily developments in 12 US cities. In the first round he found that 70% came from nearby neighborhoods with above-average incomes, but these moves initiated a kind of housing musical chairs, which he tracked a process he calls the migration chain. By the sixth step he found that approximately half of the moves occurred in below-median income neighborhoods. His analysis suggests that for every 100 new market-rate units built, approximately 65 units are freed up in existing buildings, allowing many as 48 households in moderate- and low-income neighborhoods to move into better homes.
Councillor Isitt explained his support for the 20% requirement, saying, “I’m personally not very interested in strata buildings where at most we’re going to see 10 per cent of the units being available to people who aren’t wealthy.” This raises the question, who is wealthy?
A recent search identified 67 condominium units in Victoria that are priced $300,000-600,000, which could be affordable, as rentals, or for purchase to those with a 20% down payment, to households earning $50,000-100,000 annually, which is generally considered a moderate rather than wealthy income. Many of these units are in recently completed downtown high-rises. This indicates that the current market does deliver housing suitable for non-wealthy households, the production of which would almost certainly decline with a 20% affordable housing mandate.
It is a mistake to assume that housing is either “affordable” or “luxury.” In fact, most housing, including a major portion of high-rise condos, are moderate-priced suitable for moderate-income households when new, and affordable to lower-income households as they depreciate. To increase affordability we will need lots more moderate-priced housing. Our development policies should be evaluated based on their impacts on such development. Inclusivity requirements beyond what the market can bear are likely to reduce affordability overall.