Mayor Gainey’s Exclusionary Zoning Proposal

Mayor Gainey has just announced a zoning reform proposal that will raise your rent. The proposal would make newly constructed apartments¹The proposal would apply to apartments with 20 or more units.illegal to build unless 10% of the units were sold at a price below their construction cost²The proposed ordinance would restrict rent and owner occupied sale prices for these units in perpetuity. This policy is currently in place in Lawrenceville, Bloomfield, Polish Hill and the majority of Oakland, but Gainey’s proposal would expand it to the rest of the city. The exact language capping the rent/sale price can be found here. It limits rents and sale prices to less than half of what the prices would be for comparable market rate housing. For units in the existing program, the affordability term is only 35 years, but the Mayor’s proposal includes changing this to be in perpetuity.. This requirement is so burdensome it will reduce the amount of new housing that gets built. The reduced amount of new housing that does get built will need to be sold for a higher amount to cover the cost of the price controlled units.

This policy will allow the landlords who own Pittsburgh’s existing rental housing stock to raise rents since they are protected from having to compete with new units. This isn’t just a hypothetical. This Pittsburgh Business Times article documents that when trying to market an apartment building to new owners, they told potential buyers that the Mayor’s zoning proposal will stifle competing developments:

The vast majority of people live in established rather than new construction housing³The Pittsburgh metro area had only 5.4 new housing starts in 2023 for every 1,000 existing homes, as documented here. This corresponds to approximately 2.7% of homes being constructed within the past five years. In municipal Pittsburgh specifically the 2022 Pittsburgh Housing Needs Assessment states on slide 82 that in 2019 Pittsburgh had 138,000 occupied households and 19,000 vacant units. On slide 87, it states that only 4,644 housing units were constructed between 2015 and 2022. This corresponds to only approximately 2.9% of the Pittsburgh housing stock having been built in this seven year period.. Therefore prevailing rents in established units is what primarily affects displacement and typical rent burden. Increasing the rent for these households is the primary mechanism by which the Mayor’s proposal will cause harm.

Zoning requirements that make it more expensive to build new housing have the effect of excluding people who can’t afford housing built to the legal requirements. For this reason, these types of zoning laws are collectively referred to as exclusionary zoning. Proponents of this policy have used the misleading term “Inclusionary Zoning” to market it, despite it being a type of exclusionary zoning. The name is about as accurate as when Republicans claim their tax cuts will raise revenue.

In most cases in this post I will refer to the policy as “Affordability Mandates” rather than as “Inclusionary Zoning”.

An evaluation of “inclusionary zoning” by the PA State Planning Board concludes that affordability mandates make housing more expensive. Their white paper states:

Can [Mandatory Inclusionary Zoning] bring scalable affordable housing to the market? The short answer is no, it does not work … Mandatory Inclusionary Zoning can result in 15-20% increase in market rate rents…making naturally occurring affordable housing⁴In planning parlance, “naturally occurring affordable housing” is market rate housing that is affordable to low income people without government subsidies or deed restrictions. I really hate this terminology because market rate affordable housing doesn’t just spring out of nature like trees. It is a product of the people who build and maintain homes, and happens when government policy allows people to do those activities cost effectively. much harder to achieve.

Misconceptions about What Causes Rent Increases

Many of the proponents of “Inclusionary Zoning” are well meaning and want to use it as a tool to expand access to affordable housing. However, the program design is based on a fundamental misunderstanding of what causes rent to increase.

Rent increases in a neighborhood typically start with a rise in demand to live there. Most commonly this is due to an increase in the number of local jobs (for example, Google opening offices in East Liberty; Children’s hospital and various startups in Lawrenceville). It can also be due to an increase in amenities (the strip), or an increase in the size of university student bodies⁵Undergraduate enrollment at the University of Pittsburgh has increased by 5,118 students from 2013 to 2023, as documented here. For comparison, the whole city of Pittsburgh only built 3,106  housing units between 2010 and 2015, as documented on slide 87 of the 2022 Pittsburgh Housing Needs Assessment.(Oakland). Rents rise in response to the higher demand, and absent legal constraints on new construction developers will respond by building homes to accommodate the additional residents who want to live there. Any constraints such as affordability mandates that increase the cost of building new homes mean that rents need to rise to a higher level before developers start building new homes. Incumbent landlords are thus able to charge higher rents before they face competition from developers.

Since rising rents caused by increased demand often spur developers to build more housing, people often misattribute the rent increases and blame the developers. This misperception is made worse by the fact that newly built housing sells for more than similar older housing in the same neighborhood for the same reason that new cars sell for more than old ones.  However, the available research⁶Noah Smith does a good job summarizing and citing the research in this blog post. overwhelmingly shows that building new housing helps improve affordability. Blaming developers is a bit like noticing that there are often ambulances near heart attack victims and blaming the ambulances.

When developers are prevented from building housing for new residents who want to live in a neighborhood, supply is matched with demand in two ways:

1. Lower income people are displaced from the neighborhood by people who can outbid them for rent.
2. People who want their own home are forced to have housemates to be able to afford rent. In some cases this can be adult children who want their own place living with their parents.

Rents rise until enough people live with housemates or are displaced that demand matches the supply.

The best way to limit rents and prevent displacement is to make it easier to build new housing.

Other Problems with Affordability Mandates

Mandating affordability causes problems beyond increasing rents and driving displacement.

The proposed affordability mandates are a form of rent control on a subset of newly constructed housing. Rent control has been studied by extensively, and the academic research is summarized well in a paper by Konstantin Kholodilin⁷Noah Smith does a good job summarizing this study in layman’s terms here..

This paper finds rent control leads to:

• Higher rents for uncontrolled dwellings.
• Reduced residential construction
• Reduced mobility for residents. 
• A deterioration in the quality of those dwellings subject to regulations

On the last point, the paper reads:

The landlords, whose revenues are eroded by rent control, have reduced incentives to invest in maintenance and refurbishment, thus they let their properties wear out until the real value of the dwellings decreases and becomes equal to the low real rent.

To reduce these problems, many rent control programs exempt new construction buildings. This largely addresses the problems of reduced construction and higher rent for uncontrolled buildings. However, the proposed affordability mandates only apply to new construction apartments and would cause all of these problems.

The problem of deterioration in dwelling quality is possibly even greater for homeowners who buy an affordable unit at a capped sale price. Since they are required to sell the unit at a below market rate price⁸In the existing program, the affordability term is 35 years, but it resets for another 35 years if the owner sells the property before the 35 years is up. The draft language revised program changes the affordability term for rental properties to be in perpetuity. However, for owner occupied properties there is currently a placeholder that says “need proposed language”. The webpage summarizing the proposal states “Exploring options to provide equity in for-sale housing, allowing sellers to earn a profit while ensuring the home stays affordable for the next buyer.” There’s no way to structure this that both prevents an owner from selling for a windfall while also fully incentivizing them to maintain their property., the owner won’t get their money back if they have to make an expensive repair. In a few decades time, owner occupied units that become available for sale may have broken appliances and other major deficiencies.

Reduced mobility is a major problem imposed on the beneficiaries of the affordable units. To maintain the benefit of subsidized rent, people need to stay in the subsidized unit they are lucky to get. However, the housing that is best suited for a person’s needs changes over the course of their life. People need to change housing when they have kids, change jobs, or have different needs due to aging. 

The creation of price controlled units incentivizes people to stay in their existing homes even when that doesn’t align with their needs. It also incentivizes people to limit their job search to avoid the need to move.

Another problem with the program is that to be eligible for an affordable unit, a household’s income must be below 50% of area median income⁹\$29,700 per year for a 1 person household in 2021, per slide 126.. If the households income subsequently rises above 80% of AMI, they are no longer permitted to renew their lease. The affordable units are thus a poverty trap for their residents, as any beneficiary that manages to earn close to the median income is punished with loss of their home as well as loss of a housing benefit worth approximately \$1,000 per month¹⁰The 2022 Pittsburgh Housing Needs Assessment states on slide 89 that the average rent for Class A apartments, which are basically apartments built in the past 15 years, was \$1,834 per month in 2021. The rent limit for a 1 person household at 50% AMI is \$740 per month and at 80% AMI is \$952 per month. The rents for some new construction apartments are considerably more than \$1,834 per month so a lucky few low income people stand to reap a substantial windfall..

This same eligibility requirement also creates a marriage penalty in cases where getting married pushes a household’s income above the eligibility threshold. One reason that low income families have lower marriage rates is that many social safety net programs have eligibility criteria that would cause people to lose benefits if they get married. Programs with this feature harm low-income kids.

A final drawback of the program is that it weakens Pittsburgh’s tax base. Reducing the number of homes that get built reduces the amount of property tax revenue available to the city, and it reduces the number of residents paying income taxes. It also reduces the number of people paying into the water utility system. Pittsburgh has large fixed infrastructure costs and legacy pension liabilities from when it had a larger population. Growing our population would allow these costs to be spread over more people and ease the financial burden on existing residents.

It is not Possible to Meet the Affordability Requirements by Building More Cost Effectively

Defenders of affordability mandates claim that developers should design the units in a manner that can be built affordably rather than building ‘luxury units’. One city councilmember told me in an email that developers should avoid granite countertops even if including them would improve their profits because affordability is important.

The reason developers don’t build housing that is affordable to low income people is because it is not possible to build that cheaply to modern standards without government subsidy. Interior finishes (which includes cabinets and countertops, plumbing fixtures, painting, flooring and appliances, among other things) only makes up 15% of the cost of the average home¹¹This is based on a survey by the National Association of Home Builders (NAHB) documented here. Construction costs represent 60.8% of the cost of the average home (with land being the next biggest cost), and interior finishes are 24% of construction costs. Brian Potter’s Construction Physics has an excellent blog post that goes into more detail on the cost breakdown..

The price reduction that is achievable from using cheaper interior finishes is much less than 15% though, because that would require the apartment to be sold without any plumbing fixtures, finished flooring, cabinetry or countertops. Furthermore, the affordability mandates cap the price at more than 50% below¹²The 2022 Pittsburgh Housing Needs Assessment estimates on slide 35 that a two bedroom new construction apartment needs \$3,000 per month in rent to cover the development costs. The affordability mandates limit rent in a two bedroom apartment to 30% of 50% of AMI for a three person household. Slide 126 states that this is just \$960 per month, less than a third of what is required to cover the development costs. Similarly, on slide 89, it states that the average rent in Class A properties, generally defined as properties built within the last 15 years, was \$1,834 in 2021. This average is likely lower due to the inclusion of one bedroom apartments. market rate rents!

Developers are also prohibited from using cheaper finishes on the affordable, price controlled units than the other units in the building¹³The exact wording reads: “Except as provided in Section 902.04.A.5(j), on-site Inclusionary Units shall be equivalent to market-rate units within the building in all ways, including appliances, finishes, and square footage.” Section 902.04.A.5(j) is not in the zoning code and this appears to be a cross reference that was not updated properly from the draft version. . If someone wants to live in an apartment with granite countertops or other high end finishes, the policy requires them to subsidize a low income person to have the same finishes. However, an even wealthier person living in a single family home remains free to use whatever luxury finishes without having to fund other people’s housing. This policy will encourage rich people to live in single family homes in segregated neighborhoods rather than apartments where they might have more opportunity to interact with people of different socioeconomic backgrounds.

Housing Choice Vouchers don’t Solve the Problem

A second argument proponents make is that government funding programs are available to help developers fund the affordable units. They argue that since these cover the cost, the affordability mandate will just motivate developers to better make use of affordability programs without imposing a cost that reduces the amount of housing that gets built.

One of the available programs is Housing Choice Vouchers (HCVs), more commonly known as Section 8 Vouchers. The proposed zoning code language for the affordability mandates reads:

Only tenant-paid costs are subject to the Allowable Pricing. If a rental subsidy is provided, the total of all monthly rent, fees, charges and approved Utility Allowance may exceed the Allowable Pricing so long as the portion paid by the household does not.

Therefore, if the landlord is able to find a tenant with a housing choice voucher they can receive compensation that comes closer to covering the construction costs.

Recipients of a HCV only have to pay 30% of their income in rent, with the voucher covering the remainder up to a maximum. The maximum rent that a HCV will cover depends on which neighborhood the rental unit is in¹⁴The maximum rent is identified in the Tiered Payment Standard. The monthly rents associated with a two bedroom unit are provided as follows:

Max Rent from tenant (30% of 50% of AMI)	$960
Maximum Rent Paid to Landlord in Tier 6 Neighborhood such as Fineview	$1,406
Maximum Rent Paid to Landlord in Tier 1 Neighborhood such as Squirrel Hill	$2,045

The map showing which tier each Pittsburgh neighborhood is categorized as can be found here.

The actual rent paid is based on an analysis of comparables in the building and the area and considers building age¹⁵More details can be found starting on page 230 of the HCV Program Administrative Plan. and may be less than the maximums in the table.

The Housing Authority of the City of Pittsburgh (HACP) claims the number of vouchers that can be issued is limited not by the budget but by the number of landlords in the city willing to accept vouchers.

Broadly, there are four main reasons landlords are reluctant¹⁶This survey provides good data on reasons for landlord reluctance.:

1. To be eligible for an HCV, the landlord must demonstrate that the housing unit meets stringent habitability standards¹⁷Some details can be found here and here. Much of Pittsburgh’s housing stock is older and does not comply with these standards. The maximum rents paid by HCVs are often not sufficient to cover the compliance costs. Other issues with inspections include the perception that the inspections are unpredictable and capricious. Research suggests issues with inspections is the most common reason that landlords are reluctant to participate¹⁸For more detail, see this excellent paper by HUD on landlord participation in the HCV program. Landlord concerns about inspections are more common in metro areas like Pittsburgh with older housing stock..
2. Pittsburgh’s housing authority, which administers the vouchers, has had issues making timely rent payments to landlords, with payments being months and sometimes even years late¹⁹This article describes the problem. This issue may be fairly unique to Pittsburgh, as none of the research papers on landlord participation that I read while developing the post identified this as an issue..
3. There is a significant amount of paperwork to participate in the program beyond what is involved with a typical, market rate tenant.
4. There is concern that voucher holders don’t make good tenants; that they will violate lease rules or damage the property. In some cases, these concerns may be rooted in racist or classist perceptions.

Tammy Thompson, a former HACP board member, has said the reason a majority of landlords are reluctant to participate is HACP’s bureaucratic failures. These include being months and sometimes years late paying rent and taking months to process inspection paperwork²⁰Tammy’s criticisms of HACP are summarized in this article. A podcast she gave where she goes into more detail can be found here.The quote below is from the 48 minute mark of the podcast.. She has said in a recent interview:

It is not because landlords don’t want to rent to Section 8 tenants that they are not renting and being involved in this program it is because of the inefficiencies of the housing authority and that’s a fact. Period.

In 2015 the city passed an ordinance requiring landlords to accept tenants with housing choice vouchers²¹Technically the ordinance forbids discriminating against prospective tenants based on their source of income. City officials stated that the reason the ordinance was needed was that landlords routinely refused to accept prospective tenants with housing choice vouchers.. However, the Pennsylvania Supreme Court struck this ordinance down as unconstitutional. 

The affordability mandates thus functionally act as a work around, effectively creating a fine for any landlord of a new building that doesn’t lease 10% of their units to HCV holders.

HACP provides active rent vouchers to around 5,117 households that house 11,534 people²²Source.. There are thousands of households on the waiting list for vouchers²³Public Source is the news source that has done the most thorough local reporting on the HCV program. However, its articles have contradictory numbers on the size of the wait list. This Public Source article states there are 1,428 households on the voucher waiting list. This Public Source article states that there are 28,000 households. This Public Source article states 6,009 are on the waiting list. This HACP report submitted to HUD in 2023 states there are 4,100 households on the waiting list., and HACP is not accepting new people for the wait list at this time.

The Federal Government has authorized funding for approximately 7,300 vouchers. Since HCAP claims²⁴When recipients are provided a voucher, they have 90 days to find housing or their voucher will expire. In this article, HACP executive director Caster Binion states “if I release 100 vouchers, only 33% will get filled.” However, some policy analysts have criticized HACP for diverting money from the voucher program to other purposes. This implies HACP’s claim about being unable to find landlords is disputed. it is unable to find enough landlords to accept all these vouchers, HACP has diverted the funding for approximately 2,000 vouchers to instead fund new construction affordable and mixed income housing projects.

If the affordability mandates result in more landlords being willing to accept HCVs, the waitlist would only be reduced if HACP issued more vouchers. This would have the tradeoff of reducing the amount of money they have to spend on other projects.

However, the affordability mandates are likely to reduce the number of landlords who accept vouchers overall. This is because the mandates will reduce the overall construction of new housing, exacerbating the housing shortage. With more renters competing for the limited remaining housing stock, landlords would have more choice about who to rent to and more opportunities to charge higher rent to people without vouchers.

Additionally, by reducing the ability of the market to replace older housing with new, the average age of the housing stock will rise. As housing gets older, it becomes harder to maintain with the budget limits of HCV vouchers.

These effects could result in more funding required per voucher to get people housed. The overall result of the affordability mandates could be that HACP is not only able to issue fewer vouchers but also has less money for other affordability projects.

Funding Sources for Owner Occupied Units

Many multifamily buildings are built to be sold as owner-occupied condominiums. HCVs don’t provide any funding to support the affordable units in owner occupied buildings. There are some other funding sources that developers could use for owner occupied units. However, use of all these sources come with drawbacks that make them inappropriate for many projects.

Many funding sources come with requirements that add to the cost of the project. For example, the Redevelopment Assistance Capital Project (RACP) program requires that prevailing wages be paid on funded projects, which adds about 20% to the labor costs²⁵This problem is described in a talk to Pro-Housing Pittsburgh given by James Eash, who works for the affordable housing non-profit ACTION Housing. The applicable discussion starts at the 39 minute timestamp in the video.. Paperwork to document compliance with grant requirements also creates a cost.

Another major drawback of these funding sources is the project delays that result. Application and approval timelines for local, state and federal programs are not synchronized. Furthermore, getting grant awards from some funding sources are often contingent on getting awards from others first, which means that funding applications often need to be made sequentially. 

One of the largest funding sources for affordable housing projects is the Low Income Housing Tax Credit (LIHTC) program. LIHTC is used by both for-profit and non-profit housing developers and is typically the first funding source obtained since a successful LIHTC award is often necessary for a project to be viable. The bureaucratic review, approval, and closing timelines are long and can be unpredictable due to administrative backlogs at the agency that operates the program. An organization’s ability to obtain grants can be affected by relationships with politicians that have influence over the program. It is not uncommon that LIHTC applications go through more than one funding round for consideration prior to approval to navigate the political climate. This is because the awards are given on a competitive basis and there are typically only about 40 awards a year across the entire state. There were six awards in Pittsburgh in 2024, which is more than typical. LIHTC awards are almost always paired with other Federal funding sources that include expensive regulatory and compliance requirements. These delays and compliance requirements can be large deterrents for developers. The flipside is that once the LIHTC is approved, it generally makes it easier to bring in remaining gap funds as LIHTC are often the substantial funding source for projects²⁶My source for this paragraph is verbal conversations with someone who does fundraising and grant applications for a non-profit in the affordable housing space..

These delays are expensive. A developer generally wants to acquire a property before investing too much in the design work. The developer will need to pay interest on any capital for site acquisition while waiting for approval for any public grants.

Because the government tends to regulate itself more strictly than it does private actors²⁷Matt Yglesias wrote an excellent (paywalled) article on this., accepting government money doesn’t make sense for every project. Many affordable housing projects cost more per unit to build than market rate developments which opponents label ‘luxury apartments’ when expressing misplaced concerns about gentrification.

Affordable housing works best when it’s done with willing partners. The affordability mandates will cause private, for profit developers that specialize in market rate housing to compete for limited grant money with developers who specialize in and want to develop affordable housing. This is a recipe to spend our tax dollars less effectively.

Public funding sources for affordable housing are not sufficient to support Pittsburgh’s current, limited application of “inclusionary” zoning. The existing program has already stopped the construction of hundreds of housing units, as discussed in an excellent blog post by Pro-Housing Pittsburgh. Gainey’s proposal would expand the program to cover the whole city without providing any additional funding. If developers have to pick up more of the tab, that will reduce the amount of housing that gets built overall.

Future Blog Posts

As I developed this post, it became too long to cover all the topics I had originally intended.

I hope to write a follow-on post in the near future on how the government can effectively help low income people meet their housing needs. Government subsidies to supplement the free market are needed in some cases to ensure everyone has access to safe and healthy housing. Attention to detail in the program designs are important to ensure effective programs.

I will also write a follow-on post about several other zoning reforms announced by the Mayor. The other zoning reforms²⁸The other reforms are ending parking minimums, reforming minimum lot size requirements, legalizing accessory dwelling units and transit oriented development near select transit stations. are excellent. They would improve affordability, give people more choice in housing options, and would improve our transportation system. The original intent of this post was to evaluate whether the benefits of these reforms outways the drawbacks of affordability mandates²⁹Spoiler: The harms of affordability mandates exceed the benefits of the other reforms.. However, the post became too long so I will address this point in a follow-on post that I hope to publish soon.

Conclusion

Adding affordability mandates to the zoning code, a policy that proponents refer to as “inclusionary zoning”, would have the following consequences:

• It will raise the rents for any tenant not fortunate enough to get a rent controlled unit.
• It will raise housing costs for new prospective homeowners or existing homeowners who need or want to move.
• It will increase property taxes and reduce funding available for municipal serves as a consequence of shrinking the city’s tax base.
• It will result in a deterioration in the quality of the housing stock for rent or price controlled units.
• It will reduce the mobility of residents of rent/price controlled units and discourage them from expanding their income.

The number of people who are lucky enough to get a rent or price controlled unit is likely to be very small because of the degree to which the policy discourages new construction³⁰Even if the affordability mandates have no effect reducing new construction, the number of affordable units the program creates would be small. On slide 87 of the 2022 Pittsburgh Housing Needs Assessment it states that only 7,750 units of housing have been built since 2010. If we assume that 90% of those were apartments with more than 20 units, affordability mandates would have only resulted in 698 affordable homes since 2010. For comparison on slide 106 it states that the city has a shortage of 8,200 affordable homes.. This is a bad, counterproductive program.

Pittsburgh should repeal the “inclusionary zoning” overlay in the neighborhoods where it already exists rather than expanding it to apply to the whole city.