Inclusionary Zoning: Considerations for an Affordable Housing Policy

November 5, 2021

A picture of apartments overlooking trees

What is Inclusionary Zoning?

Inclusionary Zoning (IZ) is a planning tool used by municipal governments to encourage or mandate developers who intend to build new dwellings, to “set aside” a portion of these units for affordable use. Such units may be allocated for sale or lease at affordable rates. Developers may also have the option of building the affordable units in other locations within a city, or they may be able to pay cash in lieu of actually developing the units. Municipal governments may offer incentives such as further relaxations on building height or “density bonusing” to generate more investments from developers in affordable housing. 

Rationale for adopting an Inclusionary Zoning policy

The rationale for adopting the policy partly stems from a general failure among many local governments to effectively leverage the dynamics of the market to create affordable housing options for low - and moderate-income people. For instance, in Toronto out of the 230,000 new housing units that were constructed or slated for development over the last five years, only 2% offered rents at or below market rates. Most of the new buildings are condominiums or detached homes. Housing options available for those living on fixed incomes like seniors or for people making a living off precarious employment like many young adults, are negligible.    

Local planning and infrastructure investment decisions have created conditions to promote private development activity in major cities across Canada, but not enough affordable housing has emerged out of this process. Specifically, zoning amendments such as density relaxations and encouragement of mixed -use development signal greater economic activity, in turn promoting speculative behaviour in land markets. Prospective investors and developers make projections about potential development revenues generated based on the policy changes and related market and operational variables, in practice materializing into inflated investments in land. To maximize profit margins, new housing built on these lands are priced at rates that are targeted towards higher income earners. 

The strategy is thus investor driven - one that endeavours to increase returns at exponential rates. The housing needs of households in the low- and moderate-income range are effectively overlooked, leading to a form of market failure that warrants some form of government intervention. Indeed, public policy appears to have created conditions for the development industry to reap windfall profits without many conditions in place to capture a meaningful portion of the proceeds for the greater needs of the public. 

IZ closes part of this gap. By requiring or negotiating with developers to provide affordable housing options either directly or through cash in lieu, evidence from most jurisdictions that have experimented with the policy shows that affordable options can be created over time with varying levels of success. Plus, it is likely that the restrictive orientation of the IZ policy tool has a dampening effect on the skyrocketing prices of land in many cities. 

Limitations and criticisms of Inclusionary Zoning 

Opponents of the policy tend to point to the policy’s cost prohibitive design. This, they suggest, leads to rising house prices, the burdens of which are carried by prospective homeowners, or supply could be constricted at a city-wide level. However, the theoretical basis and evidence to support such claims are fragile.

Firstly, property buyers tend to be sensitive to dramatic price shifts, so developers are left with little room to pass on high costs to these groups without risking losing market share. To the extent that there may be some increase in house prices in select cases, the role of IZ in this increase is minimal. In areas such as the Washington-Baltimore region, where the effects of the policy on supply have been studied, there appears to be no evidence of any negative effects after the introduction of the IZ policy. 

While IZ clearly demonstrates potential, it can only work in cities with hot property markets, ones which are experiencing population and economic growth. If house prices are not escalating rapidly enough, then developers do not have the room to internalize the costs of the policy and generate sufficient returns. In fact, within cities, some neighbourhoods might be experiencing faster growth than others, implying the need for a differentiated approach to applying the policy. 

Further, IZ primarily benefits moderate-income earners. A private developer can only do so much in creating affordable housing options. To sustain the arrangement, the prospective homeowner or renter must be earning a reasonable income generated from employment. This helps cover costs of rent or mortgage as well as maintenance and repairs over time.  Its potential of helping meet the needs of this group is significant. Persistent shortfalls in affordable housing options can increase the risk of labour shortages on account of pricing out such households who then seek out cheaper options in other jurisdictions. 

However, households in lower income categories such as newcomers and single-parent families have limited mobility options given that economic opportunities and social and physical infrastructure tend to be concentrated in larger cities. Neglecting such groups threatens the very economic dynamism and social fabric of large metropolises. A creative IZ policy that includes provisions for more stringent affordability requirements in some areas along with additional supports may hold some potential in covering a wider spectrum of income groups including households living in more precarious economic conditions.  

Experiences of other jurisdictions with Inclusionary Zoning 

Several European countries have experimented with various forms of IZ over the years. The United States, given its long history with implementing the policy, and comparable federal structure to Canada is noteworthy. IZ started emerging in the 1970s in American urban policy as federal housing programs started to wind down.   

Today, there are over 500 IZ programs in about half of the country’s states, with jurisdictions ranging from large cities such as Chicago to smaller communities like Telluride, Colorado. The majority of initiatives is concentrated in California, New Jersey and Massachusetts. Key facts include:  

  • Program beneficiaries are rarely from very low-income households; instead target groups are in the low to moderate income categories.  
  • Policies are either mandatory or voluntary, with some evidence pointing to greater efficacy of mandatory programs on housing outcomes.  
  • Set aside rates for affordable housing usually ranges between 10 and 20%, rarely exceeding this limit.  
  • In big cities such as San Francisco and New York, the policy is restricted to rezoned areas.  
  • Developers can avail of alternative options in lieu of constructing affordable units on site, including paying cash and constructing homes off-site.  
  • The period of affordability also varies; shorter term arrangements run the risk of conversion to market rate housing as is evidenced in the depletion of affordable housing stock in jurisdictions such as Chicago.  

The extent to which IZ can generate a significant number of affordable housing stock is contingent on the calibration of the policy, the permutations and combinations of which are determined by local context. 

Montreal and Vancouver were the first Canadian cities to start experimenting with voluntary forms of inclusionary zoning. As provinces empower municipalities to adopt the policies, more are considering following suit. Notably, Toronto has proposed a mandatory program that will last for 99 years. Such actions point to an increasing recognition amongst municipal governments across Canada that value capture tools are a critical way to address the growing housing crisis in the country.

Get the latest updates about the right to housing in Canada