When The Treatment Perpetuates the Disease
This article is part four in a series on top-down power, and how a Strong Towns advocate might use existing top-down programs and federal funding streams as tools (in the short term) for boosting local resilience.
Apartment construction in Portland. Image via Flickr.
The Curious Case of Portland's 19-Unit Buildings
Examine building permits issued in Portland, Oregon, over the last three years and you'll notice something strange: the city seems to be acquiring a bunch of new 19-unit apartment buildings. Not 15. Not 25. Not 20. Specifically 19.
Why 19? The answer is no mystery to planners and housing advocates in the region. In December 2016, Portland enacted an Inclusionary Housing policy which requires the developers of all apartment buildings of 20 units or more to set aside a portion of their units for low- and moderate-income housing.
20 units or more. Get it?
In a recent Twitter thread about the phenomenon, commenters pointed out similar spikes in new 49-unit buildings in Minneapolis, 29-unit buildings in Newark, New Jersey, and even an international parallel, the proliferation of 9-unit apartment buildings in London. All are in response to regulations that begin at cutoffs of, respectively, 50, 30, and 10 units. This phenomenon is analogous to other historical cases of regulation leading to strange incentives. (Perhaps the most famous is that of the iconic Mansard roofs of Paris, which began not as an intentional architectural vision but rather a clever hack on the way buildings were taxed at the time.)
Graphic showing the steep drop-off in multifamily construction in Portland after the city’s inclusionary zoning policy took effect in 2017. Republished from City Observatory.
The 19-unit cluster is a side effect of a bigger problem. What it implies is not just that Portland is missing out on some 22- or 26-unit buildings, but more importantly that the inclusionary zoning policy is costly enough for builders to be worth trying to evade. And this means it's almost certainly depressing new housing construction more broadly. City Observatory has published evidence to this effect, describing an observed drop-off in apartment permits as a "Wile E. Coyote moment" for new housing starts in Portland. The real loss is sites that, as the Sightline Institute's Michael Andersen put it, could have become apartments for people but instead are remaining car washes.
When The Treatment Perpetuates the Disease
I wrote before about the principle of "harm caused by the healer" and how it relates to urban policy. It's an important piece of the broader question of when and how to intervene in a complex, adaptive system—like the housing market—to redress a specific harm. If you intervene in the wrong ways, the unintended consequences may swamp the good you were trying to do. Housing policy is rife with examples of this: policies intended to create affordable housing which either result in less affordable housing overall, or which render policy makers dependent on the same dysfunctional system and bad incentives which produced a housing shortage to begin with.
The question I'm tackling here is not, "Should governments subsidize affordable housing for those in need?" My answer is generally "yes," and if yours is "no" or a more qualified "yes," I respect that but am not going to debate that in this piece. There are people suffering right now for lack of access to shelter they can afford in a city they consider home, and they can't wait for long-term remedies to play their course. "Fix the zoning, and housing will be more affordable around here in 30 years" is an insulting answer to someone who needs an apartment in 30 days.
The question is, "How can we help people now without deepening the problems that got us into this mess?"
Inclusionary zoning, like Portland's policy, is one popular answer. It feels like a freebie, because it puts the onus for paying for subsidized housing on land owners and high-end developers. It can also be a useful desegregation tool, as it ensures that there are some low-priced homes in otherwise uniformly expensive neighborhoods. But the economics of it get tricky. If it ends up depressing housing supply further by acting as a deterrent to new construction, it may negate its own benefits or worse. Not only will it do nothing to alleviate the general housing shortage; it's also the case that a building that never gets built is a building that never contains any designated affordable units, either. 15% of zero is still zero.
Good public policy should not require the people in charge of implementing it to be in possession of a crystal ball. Yet how well a particular inclusionary zoning program works depends on ever-changing market conditions that are hard to anticipate. One year, it might be profitable to build 50 apartments on a particular site if eight or 10 of them must be low-income units. The next year, factors such as demand, labor costs, or materials costs might have changed so that the very same low-income requirement is now a deal-killer. Are planners supposed to be constantly updating the program based on their best understanding of these constraints? What happens when (not if) they get it wrong?
Image via Flickr.
Another problem is that tying affordable housing to high-end market rate development risks giving city leaders an incentive to prefer high-end market rate development over approaches (like widespread incremental development) that might lower the costs and spread the benefits of new construction more broadly. I recently gave a presentation to a group of affordable housing advocates from a smaller city in Northern California, and was asked a question about inclusionary zoning. I didn't condemn it categorically, but I pointed out the "crystal ball" problem, with Portland as a cautionary tale.
They responded, in effect, "Well, okay, but right now, the only affordable housing units we get at all are the ones built through this policy. We can't afford to give that up."
In this case, doubling down on inclusionary zoning as a tool meant having an incentive to court the kind of high-end development projects to which it's possible to attach a bunch of inclusionary requirements and/or other community concessions. In the worst cases, it means being okay with an oligopoly in your development market: a status quo in which only a few big developers who do big, expensive buildings can hire the best lawyers and navigate a convoluted set of requirements and delays, and smaller builders (who cannot practically be subjected to most mandatory inclusionary requirements) are at a crippling disadvantage.
This isn’t a reason to never use that tool. Inclusionary zoning as a tool is hotly debated and studied and you’ll find a range of valid, thoughtful perspectives.
But you won't solve housing affordability in any scalable way if the primary way you get your affordable homes is by skimming off the top of an overheated market, and if that mechanism collapses as soon as the market is less hot.
Another major source of affordable new homes also has this problem: the Low-Income Housing Tax Credit (LIHTC), a federal program which reimburses investors on their tax bill (such as corporations and pension funds) for financing the production of housing earmarked for low-income residents and below-market rents. LIHTC produces the majority of dedicated affordable housing in the U.S. The problem is that it works best when the market is fairly strong: that's when it's easiest to finance and build new projects. In other words, it's pro-cyclical.
But the need for affordable housing doesn't go away when the market cools or crashes; in fact, that need gets more acute, because more people are out of work or in precarious situations. After the 2008 crash, companies experienced heavy losses, and demand for low-income housing tax credits cratered. As a result, just as the housing crisis was most dire, and many foreclosed homeowners were beginning to enter the rental market, the nature of this funding mechanism temporarily kneecapped the ability of affordable-housing developers to create more of their product.
Overwhelmingly, our mechanisms for producing affordable housing depend on the very market conditions that make housing unaffordable for the majority. That is untenable.
It's worth noting that this is not just a housing issue. This is a general issue with intervening in a dysfunctional system to do short-term good, not to overhaul that system or fix the underlying dysfunction. There are parallels in transportation policy, for example: this week, Chuck Marohn wrote about the habit of bike/walk/transit advocates of supporting huge highway spending bills in order to collect the table scraps for their priorities. There are parallels in economic development, too, where cities get sucked into an arms race of subsidizing bad deals with monster companies in order to secure some new development (and jobs) now, at the expense of their local economic ecosystems in the long run.
Harness the dysfunction to get a little of what we want, instead of fixing the dysfunction. It's in the realm of housing where we see this most dramatically, trapping expensive cities in a vicious political cycle. As the conditions causing housing scarcity are exacerbated, the need for affordable housing becomes more and more urgent, and the politics around it get more and more zero-sum and strident. The end point of this is coastal California, where in some high-cost cities, any new residential building that's not comprised of 100% subsidized affordable units is politically anathema to many advocates and local electeds.
How to Identify Which Band-Aids to Use
Image via Unsplash.
The premise of this whole series of posts about non-naïve intervention in complex systems is that we need Band-Aid policies—ways to help people right now and not in the future. But we need Band-Aids that aren't incompatible with treating the underlying disease.
The key to this is to have a good working theory of what the underlying disease is. In the case of housing unaffordability, the disease is a wicked problem indeed. But two overarching issues stand out: a set of regulatory conditions (such as exclusionary zoning) which have engineered housing scarcity in high-demand places, and the role of financialization in driving up the price of real estate as an asset class, to the detriment of those who need it as shelter.
How do we respond to those factors while helping people right now? Detailed policy proposals are beyond the scope of this piece, but some general examples come to mind:
Build public or social housing (or acquire existing homes and keep them affordable to low-income residents) at direct government expense. This helps alleviate supply shortages, and it doesn't leave us as dependent on private development oligopolies. Importantly, such housing can actually be built counter-cyclically, choosing to create more of it (and keeping people in construction and the other skilled trades employed) during an economic downturn when need is greater and the cost of developable land is lower.
Try to diversify your funding streams away from heavy or sole reliance on programs like federal tax credits. Local housing trust funds can give cities a greater range of options and control. They can also be funded by specifically taxing speculative windfall gains on expensive real-estate: again, the principle here is to try to tie the short-term Band-Aid (affordable, subsidized homes) to the remedy for the long-term problem (home prices rising out of proportion to local incomes).
Incentivize and streamline the least expensive forms of development, such as missing middle housing. To get more near-term affordability out of this approach, consider something like Portland's Residential Infill Program, which rewards small-scale developers for creating affordable units while encouraging more small-scale development, which is good for the city in its own right.
Speed up the development review process, or exempt subsidized affordable projects from parts of it (as California’s SB35 law does). This eliminates a key source of delay that kills good projects and raises housing costs.
Strengthen legal protections for tenants against unjustified, predatory evictions and price gouging.
• A lot more options that are beyond my scope here.
Want to know more about what can be done to address the nation’s housing crisis? Check out our Strong Towns Academy course, “Creating Housing Opportunities in a Strong Town,” to start developing a plan for local action that can be implemented immediately in YOUR community.
In 2016, Portland enacted an Inclusionary Housing policy affecting buildings of 20+ units. The result? The city now has a bunch of new 19-unit buildings. Let’s talk about intervening in a system as complex and adaptive as the housing market.