Austin Proves Market-Rate Housing Can Be Affordable
Austin, Texas, has been one of the fastest growing cities in the United States for several years. In the decade before the pandemic, Austin’s population grew by 25 percent. Consequently, the median rent skyrocketed from $1,200 in 2017 to a high of $1,673 in 2022.
Population growth has since stabilized in Austin, but rents have not. They have, in fact, fallen by nearly 20 percent since their 2022 peak. As of September, the median rent was only $1,355. Adjusting for inflation, Austin rents are actually lower than they were in 2017.
The reason for Austin’s rent decrease is its extraordinary housing boom, facilitated by well-crafted regulatory reforms. Particularly noteworthy is the affordable-housing program adopted in 2019, known as Affordability Unlocked.
Affordability Unlocked offers “density bonuses” for housing developments that are affordable to families earning less than 60 percent of the median family income. Zoning rules that regulate population density, such as minimum parking requirements and building height restrictions, are waived or modified if at least 25 percent of a project’s units meet the affordability criteria. Further concessions are awarded when 50 percent of the planned homes are affordable.
Yet incredibly, developers added affordable housing far in excess of the requirements. Out of the thousands of units built under Affordably Unlocked, 69 percent meet the affordability criteria. This can only occur when the affordable homes can be rented profitably at the market rate.
How was this possible?
Density bonuses work differently from affordability mandates, which are prohibited under Texas state law. Although both types of affordable-housing plans offer zoning reforms for developers who build housing for low-income residents, density bonuses are incentive-based and participation is voluntary.
With mandates, by contrast, the only way developers cannot opt out is by paying a costly “in-lieu fee” that exempts them from the affordability requirements, or by not building at all. Seattle provides an excellent case study of these drawbacks. After the city implemented its “Mandatory Housing Affordability” program for certain districts in 2017, developers shifted their energies elsewhere, and rents have continued to rise.
Mandates are predicated on the common fallacy that new luxury developments actually raise the cost of housing for lower-income residents. They direct developers to build homes for low-income tenants instead of middle- or upper-class developments, focusing on the proportion of homes that qualify as affordable instead of the overall supply. Ironically, by constraining the total supply of housing, the gap between “market-rate” and “affordability” widens.
Yet economic research consistently shows that building new housing for any income level lowers housing costs for every income level by creating vacancies elsewhere. Density bonus programs respect this reality by encouraging developers to build affordable housing in addition to other developments. Luxury developers can opt out without penalty, while the regulatory concessions attached to more modest projects might draw in smaller developers with less capital.
One lesson from Affordability Unlocked is that density bonuses encourage housing construction more effectively than affordability mandates. Permitting trends in Austin strongly suggest that Affordability Unlocked program added to the overall supply, rather than diverting construction from one type of housing to another. In 2018, the city permitted 2,500 new housing units per month, and 2019 saw only a modest increase to 2,600 (Affordability Unlocked was adopted mid-year). But permitting activity exploded in 2020, averaging nearly 3,400 monthly units. In 2021, monthly approvals averaged an astounding 4,300 new homes.
But the more important lesson is that affordable-housing programs are entirely unnecessary when the housing market is sufficiently free and competitive. The surplus of affordable homes built under Affordability Unlocked demonstrates that the zoning reforms rendered the affordability requirements moot, which Austin’s city council has recognized. Since 2023, they have been aggressively expanding the program’s zoning reforms to all types of developments.
Austin demonstrates that all city governments have to do to produce affordable, market-rate housing is get out of the way.