Learning from US policies to deliver mixed-income affordable housing in South Africa

Inside of an affordable unit in a mixed-income building; (Richard Perry/The New York Times)

by Hans Bissoondyal

Over the years, various kinds of mixed-income housing models have been implemented throughout the world. Examples include the tenant voucher-based model developed in the U.S in 1970 or the inclusionary zoning legislature just recently introduced last December in Ontario, Canada. Each came with their own strengths and weaknesses. South Africa being late to the party has at least one advantage: the results and benchmarks of previously tested policies.

When evaluating various types of mixed income housing policies in the U.S, whose policies have been vastly documented and criticised, how could Cape Town develop an efficient model focussed on results and delivery?

Mixed-income policies, for our purposes, can be classified into three types: Housing policies, Planning policies and Taxation policies.

Housing policies

Housing policies come in the form of a series of grants and subsidies from the government. In the United states one of the main policies is the Housing Choice Voucher program which is a grant awarded to local governments. The local governments then proceed to select low-income households and award then with a housing voucher. This voucher is called the tenant based rental voucher. It allows the recipient to choose his preferred neighborhood of residence and to rent housing at 30% of their adjusted income. This difference between the recipient’s contribution to the rent and the actual market rate rent would then be footed by the government.

However, local governments can choose to use 20% of the Housing Choice Voucher program grant for project-based voucher model. The project-based voucher is tied to the building. The landlord enters into an agreement with the local government to set aside a certain number of units for low-income households agreeing to charge rent at a rate of 30% of their adjustable income.

Lesson Learned

The tenant-based voucher model is part of a dispersal strategy which aims to move the poor to more affluent neighborhoods. Since the voucher is tied to the recipient, the latter can choose where to house depending on his individual need. Another benefit is that the recipient can move from one housing to another while looking for more favorable conditions without losing the facility. However, in high demand areas landlords tend to overlook voucher recipients for more wealthy tenants to avoid to extra effort of dealing with the local government for the subsidy.

This is where the project-based model comes into effectiveness. This model secures the spot for low income earners.

Another benefit of the project-based model is that elderly people and low-income earners with a disability are taken better care of. Programs which helps these people with on-site healthcare services and counselling become more efficient when the recipients are located nearby.

Settlement Housing Fund, Upper West side Manhattan; a building subsidised by project-based voucher

Zoning policies

Zoning policies are by-laws that govern what a site owner can build and the amount they can build. Zoning laws set limits and obligations such as height, number of parking bays or percentage of land a building can cover. A property developer needs to be within these limits and respect those obligations for a plan to be approved. Thus, one way to ensure that affordable housing is created is to adapt those laws.

Inclusionary zoning policies can be mandatory which would require the property developer to deliver under-market rate housing for approval from the local government, or voluntary which would rely on an incentive based system whereby the developer gets benefits for the inclusion of under-market rate housing on the site. Examples of incentives could be density bonuses which would allow developers to build more on a piece of land to offset the cost of building the affordable units or faster track permitting which would make local authority officials prioritise evaluation of mixed-income housing plans.

Lesson Learned

In a model where inclusionary zoning is mandatory and no cost offsets are offered, developers would simply not build. Unless if they could offset the cost in other ways such as raising the price on market rate units or paying lower prices for land. As the number of affordable housing units would be a percentage of units build, developers would tend to build less units and raise price for normal units to offset the cost.

Let’s say for our purposes, to comply with the mandatory inclusionary housing policy at least 20% of the units built would have to be below market rate. The developer, instead of building 50, he would build 10 units. 2 of which would be at below market rate value and the 8 other would be at a much higher quality than the market-rate units with rent also above market rate. That being said, there is also a limit to which a developer would be able to raise the price and still find customers willing to pay

To further offset cost developers try to offer less for land and if land owners in turn are not willing to sell at lower price this will also entail lower levels of housing production. By acting as a constraint on supply, it would cause other existing housing to grow more expensive. To make the model more viable and attractive, less stringency and more flexibility is required.

California, one of the U.S states where the implementation of inclusionary zoning resulted in mixed-income housing published a survey of the program in 2003. Out of the 15 most successful programs, none of them occurred where inclusionary zoning was only voluntary with incentives. Some jurisdictions with voluntary inclusionary zoning reported not producing inclusionary housing at all even while experiencing market-rate boom.

Over the years, the voluntary programs produced very little affordable housing and is dismissed as a credible option. New York city’s mixed voluntary program has been the most productive program to date but its success has been attributed to exceptional circumstances; its high housing prices. The prices have induced some developers to offer affordable housing for the right to build more expensive units.

Inside of an affordable unit in a mixed-income building; (Richard Perry/The New York Times)

Taxation Policies

Another policy playing a vital role in mixed income housing in the U.S is the Low-income housing tax credits (LIHTC). The LIHTC provide funding for a residential development by allowing investors to take tax credits.  A tax credit is the amount of money someone can subtract from its respective tax amount owed to the state.

The tax collection agency awards local governments with tax credits depending on the amount of people in its jurisdiction and latter will chooses mixed-income developments through competitive selection to pass the tax credit on under the LIHTC program. The tax credit awarded to a developer is calculated as a percentage of costs incurred in developing the the affordable housing property, and is claimed annually over a 10-year period.

To benefit from this credit, the development will have to set-aside at least 20% of its units to households whose income level is 50% below the income median level or below or set aside 40% of the units for renters not earning more than 60% of the median income.

As part of this practice, often investors would sell the tax credits to investors for cash which turns into financing for the property developer and a tax write-off for the investor.

According to the U.S department of Housing and urban development, since 1987, more than 2.4 million affordable units have been developed using tax credits making it the most extensive affordable housing policy in its history.

Lesson Learned

When the tax credits are sold for cash, they generate capital for the developer. This income allows the developer to pay off part of their loans and to lower the debt burden and make mixed-income development more feasible.The model encourages development and creates more supply of housing.

While tax credits are a great way to raise capital, it has also a certain risk factor to it for investors. To be able to claim the tax credits, the development should be able to adhere to the pre-described criteria at all time for at least 15 years. Failure to do so could result in the recapture of the tax credits.

It is also subject to demand from investors; after the recession in 2008, tax credit demands fell, less capital was raised from the selling of tax credits and the LIHTC program failed to deliver the expected amount of affordable housing.

From the government’s perspective, the first thing to do would be to boost supply from for-profit companies and generate affordable housing proportional to the performance of the property sector.

While Cape Town’s property sector is growing despite the national recession due to people moving in from other provinces and cities, it’s property sector is not strong enough to entice property developers into building mixed-income housing through voluntary inclusionary zoning.

If a Zoning measure is to be implemented, mandatory inclusionary zoning is advised. Zoning measures can be very responsive to micro-markets within a larger market. Micro-markets  such as the CBD or Rondebosch/Newlands. This may drive land prices down but rather than being considered unfair to landowners, we must recognize the uncompensated benefits landowners accrued due to value created by the local government in the form of infrastructure investment and planning. The local government would only be claiming back some of the value.

The main issue with mandatory inclusionary zoning policies is the cost making it unfeasible for property developers. To offset the cost burden of additional affordable housing, the government can allow bonuses. Such bonuses could be density bonuses which would allow mixed-income development to build more units than normally allowed per site. Another cost saving measure would be fast tracking of plan approval applications. Local governments can be ordered to prioritising reviewing  mixed-income developments before other applications. This would save time, allowing the developer to be sell the units sooner. The best policy that would help the builders of mixed-income housing is awarding them a tax credit and the introduction of a tax credit market as it would imply a literal bonus of capital.

While the measures recommended above are long term and dependent on the property market’s performance, Housing policies such as vouchers are short term measures and depend only on the government’s spending.

While the project-based voucher model is not bad in itself, the tenant based voucher model is better in terms of values and opportunity creation. It caters for individual household’s need for housing and promotes self-reliance. Aptly put by Sarah Berke,  program officer of the Family Housing Fund located in U.S, in an interview to the publication Finance & Commerce of Minnesota: ‘’ it’s about the value of having a range of housing choices within the community.’’

It is always difficult to accurately predict the efficiency of the policies, it will depend on the strength of the market, the economic context, their ease of use and other external factors. However, international best practice suggests that of the many choices, it has been these approaches which have resulted in the most successful outcomes.

All content and views expressed in this article remains the property of the author(s) and does not constitute an endorsement by Future Cape Town.

Hans Bissoondyal is third year property studies student at the University of Cape Town with an interest in city planning and urban improvement.

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