An Inclusivity Requirements Solution

Victoria City Council will soon establish new condominium affordability (also called inclusivity) requirements. Council is considering a 20% requirement, which market studies and stakeholder consultations predict will reduce the total number of condos built in the city.

As explained in my recent column, Inclusivity Requirements. What Maximizes Affordability Overall?, most of those eliminated will be moderate-priced units, because they are least profitable. A 20% inclusivity requirement means that, if each affordable unit requires $200,000 subsidy, each market-priced unit bears a $50,000 additional cost, which is feasible for a million dollar unit but makes many moderate-priced ($200,000-600,000) units unprofitable.

Reducing moderate-priced housing development reduces affordability for both moderate-income households that can purchase the new units, and lower-income households that benefit from filtering, as some families move from lower-priced apartments into the new units, and over time as the new condos depreciate. A recent study described in Daniel Herriges’s column, The Connectedness of Our Housing Ecosystem, used an innovative approach to measure filtering impacts. It tracked the moving history of residents at 802 new multifamily developments in 12 US cities. It found that 70% of occupants came from nearby neighborhoods with above-average incomes, but these moves initiated a kind of housing musical chairs, a process called migration chain, which the study tracked. By the sixth step it found that approximately half the moves occurred in lower-income neighborhoods. This analysis indicates that for every 100 new market-rate units built, approximately 65 units are freed up in existing buildings, accommodating up to 48 moderate- and low-income families. This and other research emphasize the importance of moderate-priced housing development for affordability, which indicates a conflict between inclusivity mandates and overall affordability goals.

There is a good way to reconcile the risks of inclusivity requirements with the desire to support overall affordability: exclude moderate priced units. The table below shows an example of the maximum retail prices that would be excluded from inclusivity requirements. These are less than half the price of comparable-size single-family homes, the majority of Victoria’s current housing stock, and become cheaper over time as they depreciate, increasing affordability. These values could be adjusted based on market research and indexed to inflation.

This table indicates the maximum price under which new condominium units would be exempt from inclusivity requirements. This should significantly increase development of moderate-priced housing, which will increase affordability for moderate-income households directly, and lower-income households indirectly.

Although it is difficult to predict the exact impacts, this exclusion should significantly increase the number of moderate-price housing units developed, increasing affordability overall. For example, if the market currently delivers 300 new moderate-priced condominiums annually, the proposed exclusion could increase this to 400 with a 10% mandate, 500 with a 20% mandate, and 600 with a 30% mandate, providing more housing for middle-income households and helping to drive down prices for lower-income households through filtering.