Do Inclusionary Housing Policies Promote Housing Affordability? Evidence from the Palmer Decision in California

Ann Hollingshead

Many cities have responded to rising affordability challenges with inclusionary housing policies, where a municipality requires or incentivizes a developer building a new development to contribute affordable housing units or pay a fee. While the aim of these policies is to promote housing affordability, some critics have raised concerns about their potential unintended market consequences. Specifically, to the extent that inclusionary housing policies create opportunity costs for developers and function like a tax on housing supply, they may stifle housing production and increase the price of market-rate units, reducing overall affordability. However, inclusionary policies may also increase the supply of affordable housing, which would place downward pressure on prices. This paper examines these relationships using the 2009 ruling by California’s Second District of Appeal, Palmer/Sixth Street Properties LP v. City of Los Angeles, which substantially weakened inclusionary housing policies in the rental market. This analysis fails to find evidence that weakening an inclusionary policy is associated with a decrease in the rental price of high-cost housing units. Meanwhile, these results also suggest that inclusionary housing policies pre-Palmer, in general, did promote housing affordability in the low-cost market. 

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