Affordable housing is increasingly harder to find.

To address the issue, more and more cities are turning to inclusionary zoning, a planning tool used by municipal governments to require developers to set aside a given percentage of units in a new housing development to be affordable for people with low to moderate incomes. 

Inclusionary zoning programs vary widely in their implementation. In some cases, developers may also have the option of building affordable units in other locations within a city, or they may be able to pay cash instead of developing affordable units.

Inclusionary zoning was originally conceived and implemented in the United States in the 1970s as a way to build affordable housing at the same time that the federal government started to withdraw from social housing construction and to promote racial and economic integration in neighbourhoods that were de facto segregated.

Montreal and Vancouver were the first Canadian cities to start experimenting with forms of inclusionary zoning, and then Toronto passed its version just under two years ago. Now, several other cities including Edmonton, Halifax, Mississauga, and others are also considering or in the beginning stages of implementing an inclusionary zoning policy. 

Inclusionary zoning hasn’t been effective at building affordable housing

One of the most central tenets of inclusionary zoning is to effectively leverage developers and market dynamics to create housing options for people with lower incomes in the same housing complex as people with higher incomes. In this way, the policy aims to create social mixing and integration, which have proven to negate the propagation of poverty and strengthen social mobility.  

It is a commendable outcome we should pursue. However, the way that inclusionary zoning has been implemented has not proven to effectively create enough housing options to have a strong impact on structural segregation.  

In 2017, Vancouver started their form of inclusionary zoning that incentivizes developers to build more affordable rental housing by granting them more density or waiving development fees in exchange for setting 20 percent of the units at below-market rates.

The conditions made it difficult for developers to secure financing as 60 initial inquiries fell to only 16 approved projects. A report from CBC News found that of those 16, none have been completed, as nine are under construction, three have received rezoning approval, and four are still waiting for rezoning approval. 

Even worse, the program didn’t include the ability to account for market conditions such as inflation or rising operating costs, and, now, city staff have proposed an increase in the rates for moderate-income rental housing to make sure the projects that are still in the pipeline are viable.

Montreal’s experience with inclusionary zoning has not yielded much better results. After passing a bylaw in 2021 that requires developers to make a plan to include social and family housing for new developments for any new projects larger than 4,843 square feet, the city hasn’t seen a single one.

According to CBC News, there have been 150 new projects by private developers, creating a total of 7,100 housing units, since the bylaw came into effect. None of the units have yet been made into affordable housing, with all the developers of those projects opting instead to give Montreal financial compensation. 

The money from the fees paid by developers goes into either the city’s affordable housing fund or its social housing fund. Again, according to CBC News, those fees have amounted to a total of $24.5 million, which experts say is not enough to develop a single social housing project.

In cities that have tremendously high waitlists for social or affordable housing, inclusionary zoning has not led to the creation of enough housing to meet the demand. For example, in New York City, according to Alain Bertaud, inclusionary zoning has produced only 172 affordable units per year in the program’s first 25 years. Even with inclusionary zoning, the waitlist for social or affordable housing is much larger than the supply of units and New York remains one of the most segregated metro areas in the USA. As Bertaud explains, “The program is likely to have the same distributional impact as a lottery, rather than that of a social program aiming to provide affordable housing to low- and middle-income populations.”

Inclusionary zoning shifts the burden of building affordable housing

The way Canadian cities have implemented or put forward a plan for inclusionary zoning has largely rested on the rationale of shifting the burden of building affordable housing onto developers who can afford to foot the bill. Because there is no outlay of tax dollars or government spending, the new affordable housing appears “free.” 

However, there are costs associated with inclusionary zoning. In passing the cost of building affordable housing to developers, inclusionary zoning effectively raises the floor on the price of housing in order to earn a profit, as the other units subsidize the affordable one. So, the burden of the cost falls onto renters and future homebuyers.

Much of the academic literature finds that inclusionary zoning can raise housing costs in jurisdictions that implement it. In an article for Mercatus Center, Emily Hamilton reviewed six studies that look to measure the effects of inclusionary zoning on home prices and found that four of the six studies concluded that inclusionary zoning raises prices.

Cities shouldn’t rely on private market developers through inclusionary zoning to build affordable homes for those who need them. As Ed Glaeser and Joseph Gyourko wrote years ago, you would never have farmers be solely responsible for subsidizing the food stamp program.

Rather, cities should focus on comprehensively lowering housing costs so that more and more people can find a home.

For example, with ample evidence that shows loosening zoning restrictions lowers housing costs, cities would be better off simply abandoning exclusionary zoning rather than implementing inclusionary zoning.

If cities were to remove exclusionary zoning restrictions it would still leave the issue of the lack of affordable housing available for people living on fixed incomes, such as seniors or people with disabilities, and people making a living off precarious employment, like many young adults or BIPOC people who face discrimination in the labour market.  

The most obvious solution is for the cities to fund affordable housing themselves. Municipal governments could raise property taxes—which have remained low in many of the cities with the highest housing costs and highest homelessness rates per capita—as a way of pooling together resources and raising funding. Using property taxes would be a more equitable tool for raising funding because it includes homeowners, many of whom have seen the value of their largest asset rise by a high margin in recent years, rather than passing the burden of funding onto developers, who in turn could pass it on renters and potential homebuyers who are facing raising housing costs themselves.

While it would be politically risky, it could be done. Just this year, Olivia Chow won Toronto’s mayoral race by campaigning on raising property taxes to fund affordable housing. 

Inclusionary zoning is a good tool to promote economic and racial integration, but it is not a panacea to the housing crisis. With the housing crisis only worsening, we need policymakers to be more ambitious with the policy levers available to them. Inclusionary zoning could be a part of the solution, but only if it is implemented along with a myriad of other policies that as a whole will have a targeted and comprehensive impact on housing affordability.

Canada is a big, prosperous country. Why do we insist on small-minded solutions to our problems?

For far too long we have erred on the side of far too little. Whether it’s out of considerations of fairness, protecting oligopolies, or the environment, our public policy is too focused on preventing an oversupply rather than ensuring consumer demand is met.

When governments put their thumb on the scale, it’s often because they’re worried about oversupply rather than undersupply. This supply management mentality needs to be discarded.

Agricultural supply management is a program that limits the supply of dairy, eggs, and poultry in an attempt to maintain stable prices. While stability might be the aim, structurally higher prices are the side effect. One prominent study estimated that milk prices are twice as high in Canada as in the United States as a result. While many words have been spilled on the topic of milk prices, I think it’s a useful analogy for large swaths of the Canadian economy. 

Supply management isn’t just about stable prices for consumers, but about protecting industry players. We see this in other sectors ranging from telecommunications to air travel. Stable but high prices are seen as necessary to protect incumbents. It might be a good way to run a small, closed economy. It’s an odd way to run a large, relatively globalized economy. 

Canadian governments often operate as though we’re a small, stagnant country that desperately needs to cling to its place in the world—and the things that make it unique—lest we fade away. In reality, Canada is a large and growing country. The supply management approach might work in some small European countries, but it doesn’t work when you’ve got both a rapidly ageing and rapidly growing population. 

Now, you might pause at the idea that a rapidly ageing population along with rapid population growth are distinct issues. After all, much of that population growth is in response to our ageing population. Large-scale immigration is justified in part by our ageing demographics, after all. The trouble is that while immigration helps blunt a few challenges, such as labour shortages, it creates other challenges, such as housing shortages. 

That isn’t to say that immigration isn’t a net benefit. But to get the full benefit, we need a more dynamic economy. Take housing, for instance. We’ve already got a deep housing shortage. One way to help address that is by welcoming more people with the skills to build more homes. The immediate effect is to take up existing housing units, but that can pay off if they’re able to help accelerate the pace of homebuilding. Only, construction sector productivity has been lagging. We need more dynamism in the construction sector if our immigration levels are going to be sustainable. 

It’s not just productivity, though. It’s also about land availability. Take the Greater Toronto Area, our largest regional economy. The McGuinty government identified urban sprawl as a major challenge to the region. There are indeed costs associated with sprawl. Infrastructure, pollution, lost farmland. There are surgical ways to address some of these challenges, but they took a blunt approach introducing the Greenbelt. Which meant that the housing industry needed to re-orient towards more urban density. The only problem is that while they cracked down on sprawl, they didn’t legalize enough density. So we got shortages. The government put its thumb on the scale in favour of less of a particular type of housing, but the net effect was that we couldn’t build enough of any type of housing to keep up with population growth.  

Then there’s the other side of that demographic equation: the rapidly ageing side. Canada’s health-care system is in trouble. This used to be a controversial thing to say, but it’s becoming impossible to ignore. In 2021, Canada had the highest health spending as a percentage of the economy of 30 high-income countries with universal health care (on an age-adjusted basis), but ranked at or near the bottom in many key areas of performance. A recent study by the Canadian Institute for Health Information identified significant surgery backlogs, staffing shortages, and lack of access to family physicians as pressing issues with the system. If you’ve dealt with the health-care system in any serious way lately, you probably don’t need to hear this. You’ve seen it with your own eyes. 

There are many suggestions out there for addressing our challenges. Money probably isn’t the primary issue, given that we’re already leading on that metric. We probably need to incorporate some best practices from European health-care systems, including cost-sharing or more private delivery options. That runs contrary to our supply-managed version of health care, but probably necessary if we want to provide adequate health care to an ageing population. 

Of course, embracing a more dynamic approach will annoy some people. Doctors, farmers, and homeowners don’t always like changes. But the country is changing whether policymakers do anything or not. It’s growing rapidly, adding about a million residents a year. There is no status quo option. We’ll either reform policies, or the consequences of our supply management approach will become starker, whether it’s in house prices or in hospital wait times. 

This also requires a bit of an attitude shift that I suspect is already underway. We need to stop viewing “too much” as a bigger problem than “not enough.” This is capitalism, baby. Sometimes businesses are going to fail. That’s ok. Most of our economy works that way, whether it’s a tech startup or a restaurant. Strong businesses chase out weak businesses. That’s good for consumers, and good for the economy. 

Thankfully, there are hopeful signs that change is happening. 

Take housing, for instance. Governments at all three levels have made policy changes that would have seemed unthinkable two years ago, ranging from ending detached-only zoning to eliminating mandatory minimum parking requirements in cities across the country. Similarly, several provincial governments have moved to allow pharmacists to take on more responsibilities, including writing some prescriptions. Change is possible. 

Given our growing and ageing population, clinging to the status quo isn’t an option. We should embrace more economic dynamism and less supply management. Governments should default to erring on the side of more rather than less. Undersupply—whether it’s in health care or housing—is among our biggest problems. It’s also a choice. One we don’t have to make.