A Simple Fix to Maximize Affordability

Middle-priced housing is key to true affordability, according to credible research. Our policies should reflect this fact.

The Problem

The City of Victoria recently established a new Inclusionary Housing and Community Amenity Policy which imposes a 20% affordability requirement on large condominium developments, although City-sponsored studies indicate that this will reduce the total number of new housing units built. Unless it is corrected this policy will probably reduce affordability overall.

Most of the units forgone will be moderate-priced ($250,000-600,000 per unit, depending on size and location), since they are least profitable. For every additional low-priced units created by the policy there are likely to be 2-4 fewer moderate priced units.

Increasing moderate-priced housing is critical for overall affordability. It:

• Increases moderate-income family affordability. This is important in attractive, economically-successful cities like Victoria where many moderate-income households ($50,000-150,000) bear excessive housing costs.
• Increases low- and moderate-income affordability through filtering, as some households move from lower-priced apartments into the new units.
• Increases affordability for all households in the future as the new units depreciate in value.

Housing inclusivity mandates therefore create a conflict between a relatively small number lower-income households that receive subsidized housing, and a larger number of low- and moderate income households who depend on market-rate housing, that will have fewer options and higher housing prices due to fewer units being built.

The table below indicates who benefits or is harmed by increased inclusivity requirements. Advocates often portray such policies as a way to benefit poor households at developers and rich households’ expense, but in practice, much of the cost is borne by lower- and moderate-income households who have fewer housing options and higher prices, and workers who have fewer housing units to build and sell, and local businesses that will have more difficulty attracting and retaining workers.

Housing Inclusivity Requirement Impacts

Inclusivity requirements benefit lower-income households that receive the subsidized units, but increase costs to other households.

The Evidence

Many people are skeptical that increasing supply increases affordability, but there is abundant and credible research indicates that filtering occurs, including Stuart Rosenthal’s 2014 study, “Are Private Markets and Filtering a Viable Source of Low-Income Housing? Estimates from a ‘Repeat Income’ Model,” published in the American Economic Review, and Miriam Zuk and Karen Chapple’s study, Housing Production, Filtering and Displacement: Untangling the Relationships, published by the Berkeley Institute of Government Studies.

A recent study described in Daniel Herriges’s, 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 cities. It found that building market-price apartments causes a kind of housing musical chairs, as households move into new units. 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. Similarly, a recent New York University study, Do New Housing Units in Your Backyard Raise Your Rents?, found that in New York City, 10% increase in multi-family housing stock, rents decrease 1% and sales prices also decrease within 500 feet.

If you want evidence that increasing moderate-priced housing increases affordability visit beautiful Montreal, where housing prices are 20-40% lower than in peer cities. Why? Because for the last century Montreal development policies encourage townhouses and low-rise apartment buildings in most neighborhoods. Similarly, recent experience indicates that even in high growth cities like Seattle and Portland, increasing rental apartment supply does drive down prices. During the last year these cities have built tens of thousands of new rental apartment units, and Seattle experienced a 2.4% decline, and Portland a 2.6% decline, in average rents, despite strong population and economic growth.

A Simple Solution

The problem is simple, and so is the solution: reform development policies to favor more moderate-priced housing. Let a thousand new units bloom!

The following policies encourage moderate-priced infill:

• Exempt moderate-priced housing (see table below) from inclusivity mandates. This will reverse the Inclusionary Housing Policies effects, from discouraging to encouraging moderate-priced housing development.  If the market currently delivers 500 moderate-priced units, and the 20% mandate would reduce this to 250 moderate-priced units, an exemption will increase this to 750 moderate-priced units.

The current policy includes an exemption if “applicant demonstrates that provision of 20% of units or FSR as inclusionary housing units would make the project not financially viable.” However, that refers to entire projects, not affordable units. As currently written this exemption continues to encourage developers to build expensive rather than moderate-priced units.

• Pre-zone all parcels designated for multi-family in the OCP. This will reduce infill development costs, particularly in residential neighborhoods, increasing the feasibility of moderate-priced missing-middle projects.
• Allow an additional story for corner lots, larger lots (each 1,000 square meters of lot size), and on busier streets (arterials or subarterials), since these locations minimize impacts on neighbors.
• Reduce fees and approval requirements for smaller (under 20 unit) and moderate-priced (under $600,000 per unit) developments.
• Reduce parking requirements and favor unbundling (parking rented separately from housing units) so residents are not forced to pay for parking spaces they do not need.

Together these can achieve Victoria’s goals by building enough more moderate-priced housing in walkable neighborhoods to serve growing housing demand and drive down housing prices.