How Does an Expansion of Mandatory Inclusionary Housing Affect Housing Supply? Evidence From London (UK)

Problem, research strategy, and findings: Mandatory inclusionary housing, which requires private developers to include a portion of affordable housing units in market-rate developments, has become an internationally popular policy instrument to recapture land value and create affordable housing. Two common criticisms of mandatory inclusionary housing are that 1) it produces limited affordable housing and 2) it constrains housing supply and pushes up housing prices. In this study we examined how private developers responded to an expansion of a strong mandatory inclusionary housing scheme in London (UK). Between 2005 and 2008, each of the 33 local authorities in Greater London extended their affordable housing requirements, previously for housing projects with 15 or more units, to those with 10 to 14 units. We found that the expansion led to a reduction in new developments in the target market segment (projects with 10 to 14 units) and an increase in new developments in the unregulated alternative market segment (projects with 9 or fewer units). There was no net loss of new homes, though the strategic behavior of private developers could have dampened the affordable housing output of the expansion of mandatory inclusionary housing. Takeaway for practice: Our findings suggest that, given appealing unregulated alternatives with low barriers, developers tend to divert development to avoid mandatory inclusionary housing. This, overall, calls for better evaluation of the potential alternatives and a more comprehensive, regional approach to inclusionary housing to maximize its effectiveness and to minimize its impacts on housing supply.