The Danger of Robust Inclusionary Zoning Policies without Providing Incentives

By: Zachary Betteridge

In October 2021, the Toronto municipal government proposed an affordable housing plan that instituted inclusionary zoning policies for new development projects. Inclusionary zoning (IZ) refers to policies that require new housing units to include a certain percentage of available housing to be affordable, where the monthly rental cost is at or below the market average. This percentage is called a set-aside rate. Despite the good intentions behind the city’s plan, it does not provide high enough set-aside rates to address the housing crisis in Toronto. Moreover, the policy proposes higher rates without additional incentive mechanisms for developers. The current plan is counter-productive because the lack of incentives decreases developers’ profits and in turn discourages them from developing new housing, ultimately harming those most in need. Therefore, the City of Toronto should propose higher set-aside rates and support these higher set-aside rates with policies that incentivize development to address the housing crisis successfully.

Toronto’s municipal government hired N. Baron Lyon Consultants (NBLC), a third-party consulting firm, to study what set-aside rates were feasible for Toronto. NBLC produced four feasibility reports in total. In their 2019 report, NBLC suggested set-aside rates of at least 20% in ’strong development areas’ which are defined as having high accessibility to effective public transit, such as subway lines, and have future investments in transit planned. Despite this recommendation, the municipality’s plan proposes set-aside rates of seven per cent for the first two years, increasing to 16 per cent in 2030. Why is there such a disconnect? This difference in set-aside rates results from the final NBLC study, published in 2021, which modified its methodology to include newer peer review to inform its findings. The municipality’s proposal has set-aside rates that match, and in some cases, exceeds the recommendations of this final study.    

In a 2021 study, Maytree criticized the City of Toronto’s inclusionary zoning policy as being ”too low and too slow” in addressing affordable housing. Maytree is a foundation that seeks to enact social justice in Canada. In the study, Maytree correctly points out that the kind of housing that is available is an essential question in dealing with the housing crisis. After all, what good is a surplus of housing if the average resident can’t afford to pay for it? With the current housing supply unable to match the rising demand, the price of housing has reached unaffordable prices for the average Toronto resident. Therefore, it is even more important that new development projects provide affordable housing, since older buildings will not be subject to the municipality’s inclusionary zoning plan. Higher set-aside rates are required to match this need—as pointed out by Maytree.

Maytree proposes that the municipality should simply return to the higher set-aside rates recommended in the older feasibility reports produced by NBLC. But doing so would neglect the more recent peer review that led NBLC to lower their recommended set-aside rates in their final report. Maytree cites a study produced by the Urban Land Institute, a non-profit organization that focuses on research and education enterprises, to justify their claim to consider the original NBLC report. Their study demonstrates that high set-aside rates have succeeded in similar situations to the ones found in Toronto. However, they also emphasize the importance of governments providing incentives to counteract the loss in profit faced by developers due to these higher set-aside rates. In the current affordable housing plan, the municipality currently is not planning to incentivize property developers to offer affordable units in new buildings. As such, Maytree misses a key piece of evidence in rejecting the final NBLC feasibility report.

In its reports, NBLC identifies two possible negative effects of an improper implementation of IZ policies: a shortage of housing supply, and an increase in the cost of construction. Both effects would increase the cost of housing for every Toronto resident. Since the municipality’s plan does not currently include incentives for building affordable housing, developers must front the profit loss resulting from IZ policies. Therefore, the higher the set-aside rates, the higher the cost to developers. If these costs become so high that they result in little to no profit, then developers would stop constructing housing. In this light, Maytree’s recommendation for higher set-aside rates is dangerous to the supply and status of housing.

However, higher set-aside rates are necessary to increase the supply of affordable housing. But these higher set-aside rates need to be paired with incentives because the supply of housing could seriously decrease given loss in developer profits, which would defeat the very purpose of affordable housing policy in the first place. With Toronto having one of the worst housing markets globally due to over-valuation of housing resulting from low supply and rising demand, affordable housing should be of utmost priority. Incentives would allow for a successful implementation of higher set-aside rate IZ policies. More affordable housing will be supplied as a result which should mitigate the severity of the current housing crisis.

The Urban Land Institute study considers different forms of incentives, such as tax write-offs or construction subsidies, and how successful they have been in the past. Importantly, the study notes that different cities will have different situations, and each warranting a unique understanding of which incentives to pursue. Incentives require careful consideration about which type would serve the municipality best.

While the City of Toronto should consider the feasibility of all incentive options, density bonuses may be the best approach to incentivization for Toronto. Density bonuses are a form of incentive that give the opportunity for developers to build larger buildings than what is normally allowed by law, which results in a higher total amount of rental units and larger profit for developers. This is one of the most popular incentives that other governments have provided with inclusionary zoning policies and the reason seems clear: density bonuses are a win-win-win situation. They increase the profits of developers by allowing them to make more units per building, which means a larger supply of available housing. The resulting increase in supply helps to mitigate the excess demand, thus lowering the price of all housing—not just affordable housing. On top of this market adjustment, developers use higher set-aside rates for affordable housing. Therefore, density bonuses provide a positive outcome for developers, for the average renter, and for those in desperate need of affordable housing. Therefore, the City of Toronto should seriously consider the possibility of density bonuses and their ability to provide higher set-aside rates and a better answer to the housing crisis currently plaguing Toronto.

Zachary Betteridge is a Master of Public Policy candidate at the University of Toronto’s Munk School of Global Affairs and Public Policy. He completed his bachelor’s degree in philosophy at Dalhousie University, with minors in Political Science and German. He is interested in the application of philosophical ideas to policy and politics, in particular, the growing issue of knowledge in an internet-dominated world and the integration of artificial intelligence in regulating the internet.

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