California tool to encourage low-income rentals may suppress new apartment construction

The state’s chronic housing shortage has its greatest impact on the roughly 14 million Californians either mired in poverty or nearly so.

In fact, California’s very high housing costs are a leading reason why so many are impoverished. That’s why the Census Bureau and the Public Policy Institute of California calculate real life poverty rates by comparing incomes with costs of living. Recently, the U.S. Department of Housing and Urban Development listed California as having the nation’s highest median rent at $2,895 a month.

Armed with a flurry of new laws, state officials have been pressing local governments to make it easier for housing developers to build new rental apartments that cater to low-income families. However, even when artificial barriers such as restrictive zoning are removed, the sheer cost of building such housing impedes progress.

A 2025 RAND study found that building apartments of any type in California averages $430,000 a unit — 2.8 times the $150,000 average in Texas — and housing for low-income renters costs more than four times as much as similar units in Texas. It’s not unusual for such housing to reach or even surpass $1 million a unit in some California cities.

Rather than directly finance low-income housing projects, many cities have responded to pressure by requiring developers of market rate housing to limit rents for certain units set aside for low-income tenants.

It’s called “inclusionary zoning,” and its application varies among the more than a third of California cities that have adopted it.

Some developers accept the conditions and others balk. In 2009, the state appellate court ruled that the city of Los Angeles indirectly violated California’s law barring rent control on newly built apartments by requiring a developer, Palmer Sixth Street Properties, to include low-income units in a project.

The decision, in effect, blocked cities from imposing inclusionary zoning as a condition for approving rental projects, thus cutting off what had been one of local governments’ most powerful tools for dealing with the shortage. However, it did not affect inclusionary zoning for housing built for sale.

Six years after the Palmer decision, the state Supreme Court declared that inclusionary zoning affecting for-sale projects was legal. In 2017, the Legislature enacted what was dubbed the “Palmer fix” to overturn the Los Angeles case on rental housing.

So for the past nine years, cities have resumed the practice of requiring developers to set aside units for low-income families. The legalities aside, does it work?

An exhaustive new study by UC Irvine economist Noah Kouchekinia concludes that inclusionary zoning backfires by reducing the overall production of much-needed housing of all types. He and his team delved into the programs city-by-city to determine how much housing had been built and found that inclusionary zoning “acts as a tax on construction and, all else equal, reduces the overall supply of housing,” potentially reducing overall affordability.

“I find the typical inclusionary zoning ordinance reduces annual new residential construction by nearly a third (31.8%),” Kouchekinia writes, adding, “I estimate the cost of generating an affordable unit with inclusionary zoning to be approximately $800,000 in ‘excess rents’ paid by market rate renters as a result of the policy’s constraint on supply.”

That figure, Kouchekinia notes, is higher than what it costs, on average, to directly finance a low-income housing unit.

This research is important since it suggests that inclusionary zoning — while letting local officials off the hook to provide low-income housing — in reality limits construction and is a high tax on other renters.

The study is also a reminder that when politicians adopt policies they claim will be beneficial, they rarely follow up to determine whether those policies are working.