Examining the Impact of London's Mandatory Inclusionary Housing

As housing costs continue to soar in cities worldwide, many have turned to mandatory inclusionary housing (IH) as a tool to increase the stock of affordable housing. Inclusionary housing policies vary widely, but all compel private developers to incorporate some number of affordable units when they build market-rate housing. As IH policies spread, it remains difficult to rigorously evaluate how these interventions affect the overall housing market and the extent to which they drive net gains in affordable housing production.

Impact of Mandatory Inclusionary Housing Expansion

In "How Does an Expansion of Mandatory Inclusionary Housing Affect Housing Supply?" in the Journal of the American Planning Association (Vol. 88, No. 1), authors Fei Li and Zhan Guo use data from the United Kingdom to offer a valuable contribution to the empirical evidence on mandatory IH. In 2008, an updated regional framework for IH in Greater London encouraged boroughs to expand the regulated market, shifting the threshold from 15–units or lower to 10–units or lower. The 33 local jurisdictions across Greater London adopted this change at different times. This enabled the authors to compare the newly regulated market segment (10–14 unit developments) before and after the change and look across boroughs as neighbors implemented slightly different policies.

The authors hypothesized that after IH expanded, there would be a decrease in 10–to–14-unit projects, as private developers adapted to avoid being subject to new IH requirements. Using data from 2004 to 2014, the authors applied regression analysis to compare the number of new developments by borough and by size, before and after the change.

They indeed found that there was a large jump in the number of projects right below the 10-unit threshold. Figure 2 shows the distribution of developments before and after the expansion in developments potentially subject to IH ("Market and S106 developments"). Developments that were 100 percent affordable, and thus not subject to IH, are included as a comparison below.

Figure 2. New developments by size, 5-20 units 1, 2004 — March 31, 2014.

Incentives Shape Responses to Inclusionary Housing

These findings suggest that some developers preferred to adapt — splitting developments into smaller projects — to avoid reaching the IH threshold.

Although the distribution of development types changed, the authors found little to no net decrease in overall number of units produced. One critique of mandatory IH is that it disincentivizes and, ultimately, hampers overall housing production. But in this case, the decrease in 10–14 unit developments was offset by a spike in smaller projects. As for whether the IH policy was effective at creating more affordable housing, the outcomes were moderate. Each borough saw a net increase of 2 affordable units per year. While many developers changed course, some were still subject to the expanded IH policy.

What can other cities take from this study? The findings indicate that policymakers should carefully consider the broad market context as they develop IH regulations. They should look for attractive alternatives that would allow developers to avoid requirements and think about how to broaden the policy to make those alternatives less appealing. Limiting the incentives to avoid regulation could result in greater gains in affordable units. In the context of today's crisis of affordability, planners need every tool performing at its best to spur affordable housing production.

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