What the Market Can Bear: Defining Limits to Inclusive Housing Requirements

Inclusivity requirements should be used with caution. Increasing the portion of below-market housing units tends to reduce total housing production, particularly moderate-priced homes.

April 29, 2019, 5:00 AM PDT

By Todd Litman

Washington, D.C. Apartment

David Harmantas / Shutterstock

Many jurisdictions apply inclusivity policies that require developers to sell or rent a portion of units at prices that are affordable to low-income households. The profitable, market-priced units subsidize below-market housing.

These subsidies are considered a community contribution that developers pay for the privilege of doing business in an area. Where land prices are escalating due to market trends or public improvements such as a new transit station or upzoning, affordability mandates can capture some of the profit that would otherwise go to property owners and developers, an economic transfer from wealthy to poor households.

Research indicates that inclusionary policies can increase affordable housing supply and social integration, but if applied to less profitable projects they may reduce desirable development, particularly moderate-priced housing. As a result, affordability mandates must be carefully designed to avoid causing unintended harms.

For example, in my city of Victoria, Canada, a 10-15% inclusivity target [pdf] was recently proposed, but one council member suggested increasing this to 30%. Would tripling the requirement triple the number of affordable units? Almost certainly not.

A key factor is the ratio of profit-generating to subsidy-requiring units. For example, if a unit costs $350,000 to build but must be sold for $150,000, it requires a $200,000 subsidy. With a 10% inclusivity requirement, the nine market-rate units bear a $22,222 cost, but with a 30% requirement, each of seven market-rate units bears an $85,714 cost, nearly four times higher, because a larger subsidy must be borne by fewer market-priced units. A moderate-priced unit might be profitable with an additional $22,000 cost burden, but not with an $85,714 burden, so developers will build fewer of them.

Let me illustrate the results. Assume that with no affordability mandate, the market would produce 1,000 units a year, half high-priced (over $500,000 per unit) and half moderate-priced ($200,000-500,000), but total production is reduced 5% by a 10% mandate, 15% by a 20% mandate, and 30% by a 30% mandate.






Production reduction





High-price (over $500k)





Moderate-price ($200-500k)





Low-price (under $200k)










As the inclusivity mandate increases, total housing production declines, consisting primarily of reductions in moderate-priced housing that is initially affordable to middle-income households, and becomes affordable to lower-income households as it depreciates in the future
, a process called filteringThe graph below illustrates these impacts. 

Inclusivity Mandate Impacts

In this case, tripling the inclusivity requirement adds 115 low-priced housing units, but reduces total housing production by 300 units of which 240 are moderate-priced. Does this increase or reduce affordability overall? This depends on how affordability is defined. It sometimes refers to subsidized housing built specifically for low-income households (typically, the lowest income quintile), but a broader definition recognizes that many middle-income households (second and third income quintile) pay more than is considered affordable (30% of income for housing or 45% for housing and transportation combined). Increasing affordability mandates tends to increase the supply of housing that meets the first definition but reduces supply that meets the second definition, and because housing tends to become more affordable over time, it reduces future affordable housing supply by both definitions.

Let me describe a specific example that illustrates these effects. A few years ago a local developer proposed the Bohemia and Castana, a pair of three- and four-storey mixed-use buildings with 71 residential units, a third of which were to be moderate-price rentals. Neighborhood residents objected. They considered the buildings too big and tall, although critics could never explain exactly how a fourth storey would harm them. Never-the-less, the opponents were successful: the City rejected the proposal. The developer instead constructed a three-storey building with 51 condominiums but no rental units. In a city with nearly 50,000 houses, 20 fewer moderate-priced units is too small to notice, but if this is typical, it indicates that development restrictions typically reduce moderate-priced infill housing development by about 30% compared with what the market would deliver.

Castana Building

Although the magnitude of these impacts will vary depending on conditions, these effects are likely to occur in most situations, particularly where moderate-priced housing is less profitable. This suggests that higher inclusivity requirements may be suitable where there is very strong demand for new housing, so developers will build as many units as allowed even if some sell at a loss, but softer markets with lower profits and higher risks require lower requirements or exclusions for moderate-priced units to maximize overall affordability.

In a typical situation, the owner of a half-acre lot occupied by one old house could replace it with one more expensive house or with several townhouses or a small apartment building. For overall affordability sake, the best option is to build as many moderate-priced townhouses or apartment units as possible. Imposing density limits or adding a 10-30% affordability mandate will discourage projects that add supply, resulting in single-family houses being replaced by expensive single-family houses rather than moderate-priced multifamily.

The table below summarizes the distribution of these impacts.

Who Benefits or is Harmed by Inclusivity Mandates



  • Low-income households that are selected to receive subsidized units
  • Lower-income households who fail to receive subsidized units.
  • Middle-income households.
  • Lower-income households who benefit from filtering now, or will occupy the units in the future when they depreciate.
  • Developers (lower profits).
  • Development industry employees (designers, trades, sales), who have less work.
  • All community residents if reductions in urban housing production increase sprawl and related costs (habitat loss, more vehicle travel, higher public service costs, etc.).

Although inclusivity requirements may be appropriate in some situations, to maximize total benefits they should:

  1. Not apply to smaller projects, such as fewer than 20 units.

  2. Not apply to moderate-priced units, such as less $500,000.

  3. Not apply to developments in less attractive, higher-risk locations where maximum development is desired.

  4. Not substitute for other policies that support more compact, affordable infill.

For More Information

Grounded Solutions Network Inclusionary Housing Website

Bento A, Lowe S, Knapp GJ and Chakraborty A. (2009), “Housing Market Effects of Inclusionary Zoning,” Cityscape: A Journal of Policy Development and Research, Vol. 11(2), pp. 7–26.

Dan Bertolet and Alan Durning (2016) Inclusionary Zoning: The Most Promising—Or Counter-Productive—Of All Housing Policies. Great Good or Great Bad, Depending on Design, Sightline Institute.

Emily Hamilton (2018), Is Inclusionary Zoning Creating Less Affordable Housing? Strong Towns.

Sanford Ikeda and Emily Washington (2015), How Land-Use Regulation Undermines Affordable HousingMercatus Center at George Mason University.

Location Efficiency Hub provides a suite of web-based tools to help planners, developers and individuals identify and create location-efficient communities.

Todd Litman (2016), Affordable-Accessible Housing in a Dynamic City: Why and How To Support Development of More Affordable Housing In Accessible Locations, Victoria Transport Policy Institute.

Tom Means and Edward P. Stringham (2010), Unintended or Intended Consequences? The Effect of Belowmarket Housing Mandates on Housing Markets in California, San Jose State University.

Mukhija, et al. (2015), “The Tradeoffs of Inclusionary Zoning: What do We Know and What do We Need to Know?” Planning Practice & Research, Vol. 30(2), pp. 222-235.

National Housing Conference is dedicated to ensuring safe, decent and affordable housing for all in America. It includes information on inclusivity policies.

Daniel Shoag (2019), Removing Barriers to Accessing High-Productivity Places, The Hamilton Project.

Benjamin Schneider (2018), Inclusionary Zoning, CityLab

ULI (2016), The Economics of Inclusionary Development, Urban Land Institute.

Wellesley Institute Inclusionary Housing Recommended Papers and Reports. 

Todd Litman

Todd Litman is founder and executive director of the Victoria Transport Policy Institute, an independent research organization dedicated to developing innovative solutions to transport problems.


The Surprising Oil Tax in the Inflation Reduction Act

President Biden has made reducing gas prices paramount in his administration, so it was likely a surprise to hear a Republican senator last Sunday warn TV viewers that a revived and increased oil fee in the climate bill will increase their gas costs.

August 15, 2022 - Bloomberg News

People gather on a street with no cars during the L.E.A.F. Festival of Flowers in the Meatpacking District of New York City.

The Tide Has Turned Against Open Streets

Once a promising development for advocates pushing for a less car-centric future in cities, the open streets movement has ceded significant ground to cars since the height of the pandemic.

August 14, 2022 - The New York Times

Aerial view of downtown San Antonio with Tower Life Building in foreground

San Antonio Office Tower To Become Residential

With the building more than half vacant, the new owners of the Tower Life Building plan to convert the historic tower into residences that could include affordable housing.

August 15, 2022 - San Antonio Report

Colorado River

Department of the Interior Forced to Intervene on the Colorado River

More questions than answers on the Colorado River this week as the federal government failed to deliver on threats to force Southwest states to cut back on water use.

August 19 - High Country News

For Rent

Explaining Rent Inflation

The delayed effects of changes in rent costs make rent inflation a difficult figure to pin down.

August 19 - The Atlantic

Two cyclists on a paved bike trail through short grass with Dallas buildings in background

Dallas Names 66-Mile Bike and Walking Trail

When complete, the newly named DFW Discovery Trail will incorporate 50 miles of existing trails into a regional ‘super highway.’

August 19 - The Dallas Morning News

Transportation Planner, Planning Division

San Francisco County Transportation Authority

Product Manager

Texas A&M AgriLife Extension

Assistant or Associate Professor of Urban Design

Harvard University Graduate School of Design

Urban Design for Planners 1: Software Tools

This six-course series explores essential urban design concepts using open source software and equips planners with the tools they need to participate fully in the urban design process.

Hand Drawing Master Plans

This course aims to provide an introduction into Urban Design Sketching focused on how to hand draw master plans using a mix of colored markers.