SB2029: Inclusionary zoning contributes to housing crisis

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Senate Committee on Housing on Jan. 30, 2024.

Jan. 30, 2024, 1 p.m.
Hawaii State Capitol
Conference Room 225 and Videoconference

To: Senate Committee on Housing
      Sen. Stanley Chang, Chair
      Sen. Troy Hashimoto, Vice-Chair

From: Grassroot Institute of Hawaii
           Ted Kefalas, Director of Strategic Campaigns


Comments only

Aloha Chair Chang, Vice-Chair Hashimoto and members of the Committee,

Thank you for considering SB2029, which would prohibit any law, ordinance or rule from imposing an inclusionary zoning requirement on housing offered exclusively for sale in perpetuity to buyers who are residents of Hawaii, are owner-occupants and do not own any other real property.

By eliminating inclusionary zoning rules for certain properties, this bill would make an important stride toward encouraging the growth of housing in our state.

That’s because inclusionary zoning specifies that a certain percentage of homes in a proposed project have to be sold or rented at a certain price point — and that is a disincentive to homebuilders, as a large body of research shows.[1]

To make matters worse, the mandates force homebuilders to raise the prices of their market-rate homes to make up for the so-called affordable homes, and that becomes even more problematic depending on the percentage of homes that must be so-called affordable.

Based on the “Inclusionary Housing Calculator” developed by Grounded Solutions Network, our research shows that in housing markets that have a 50% inclusionary zoning requirement, it is nearly impossible to make a profit building housing without a government subsidy.[2]

For example, a low-rise apartment project with 30 units costing $18 million would incur a net loss of $7 million, if built in an area with an affordable housing requirement of 50%, according to the calculator.[3]

And the higher the IZ percentage, the greater the net loss.

If government subsidies are required to keep the homebuilders interested, then we are talking about hidden, shifted costs to taxpayers — who often are the same people who need affordable housing — and further obstacles to efficient homebuilding.

As noted by economist Carl Bonham at the Economic Research Organization at the University of Hawai‘i, inclusionary zoning “reduces incentives for developers to produce all forms of housing, and will reduce the overall supply of housing units and increase the price of housing.”[4]

In other words, inclusionary zoning requirements are a roadblock to increasing Hawaii’s housing supply — and we applaud this bill for recognizing this. Passage of SB2029 would provide a strong incentive to homebuilders to respond to the needs of Hawaii families in a speedy and efficient manner.

However, the Grassroot Institute does have one concern with the bill — namely, that it restricts buyers of the new homes to only Hawaii residents.

We sympathize with the intent to ensure that Hawaii residents have priority in the purchase of new homes, but such a restriction could run into legal difficulties, since such a restriction would discriminate against potential out-of-state buyers and thus interfere with the U.S. Constitution’s interstate Commerce Clause.

In addition, and perhaps more important, this restriction would prevent the purchase of such homes from former Hawaii residents who at one time moved to the mainland or elsewhere for whatever reason, but now very much wish to return.

Other than that, we support SB2029 and appreciate that the committee is willing to consider such a worthy measure aimed at facilitating more homebuilding in Hawaii.

Thank you for the opportunity to testify.

Ted Kefalas
Director of strategic campaigns
Grassroot Institute of Hawaii

[1] Tom Means, Edward Stringham and Edward Lopez, “Below-Market Housing Mandates as Takings: Measuring their Impact,” The Independence Institute, November 2007; “Inclusionary Zoning: Implications for Oahu’s Housing Market,” The Economic Research Organization at the University of Hawai‘i, Feb. 12, 2010; “How land-use regulation undermines affordable housing,” Mercatus Research, November 2015; Paul Kupiec and Edward Pinto, “The high cost of ‘affordable housing’ mandates,” The Wall Street Journal, Feb. 12, 2018; Benjamin Powell and Edward Stringham, “Housing supply and affordability,” Reason Foundation, April 1, 2004; and “Inclusionary zoning primer,” National Association of Home Builders, August 2019.
[2]Inclusionary Housing Calculator 2.0,” Grounded Solutions Network, 2019.
[3]Project Summary,” Grounded Solutions Network, accessed Feb. 9, 2021.
[4] Carl Bonham, “The Unintended Consequences of Affordable Housing Policy,” The Economic Research Organization at the University of Hawai‘i, Sept. 8, 2013.

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