The economic merits of Inclusionary Zoning for affordable housing

Abstract

SGS Economics & Planning has released an Occasional Paper analysing the economic merits of Inclusionary Zoning (IZ) for affordable housing.

IZ requires the incorporation of a certain proportion of permanently affordable housing in all development projects within an area.

If the developer cannot physically provide the affordable housing on site, they can make an equivalent cash payment instead so that the required number of units can be supplied elsewhere in the neighbourhood.

The affordable housing generated by IZ is transferred to a not for profit, Government registered, Housing Association.

The housing is retained in perpetuity for rental to lower income households, including key workers.

The Occasional Paper argues that IZ is not a tax on development. Like parking requirements, open space contributions, solar access standards and heritage controls, they may be warranted planning requirements to ensure successive development projects contribute to a sustainable city.

Eight years ago, the Inner Metropolitan Action Plan (IMAP) Councils in Melbourne (Melbourne, Stonnington, Port Phillip and Yarra) proposed an IZ plan for their region, modelled on the successful IZ scheme which has been operating in Sydney’s Ultimo Pyrmont area for about 20 years.

The IMAP plan targeted the retention of at least 6% of the region’s housing stock as permanently affordable rental accommodation for low and very low income people. IMAP’s plan also assumed that only half the required funds would be generated by IZ, with the other half coming from State Government.

The cash in lieu rate for developers under IMAP’s plan would have been around $30 per square metre of floor area. Studies by independent property analysts have shown that IZ cash in lieu rates of this scale would have negligible impacts on the viability and pricing of development projects.

Economic studies also show that schemes like that proposed by IMAP in 2007 are likely to deliver a benefit cost ratio of better than 7 to 1. The benefits lie in retained social mix in historically diverse neighbourhoods and the avoidance of wasted human capital when lower income groups are locked out of jobs rich inner city areas.