5 Reasons Why Renting Is Expensive In India

When Reserve Bank of India (RBI) Governor Raghuram Rajan's family moved back to India during the Emergency period, he and his younger brother took turns every day to buy bread for their breakfast. The two brothers went from shop to shop, because bread was hard to find. It was strange for them because when his family lived in Brussels earlier, they had supermarkets filled with everything they needed. In those days, the government's attempt to make them affordable by controlling prices ended up in shortages of essential commodities, and long queues in front of stores. Price controls made essential commodities beyond the reach of people, especially that of low-income households.

India's experience is not unique. Throughout history, attempts to imposed price controls have led to goods slowly disappearing from the market in many parts of the world. In the long run, this has led to prices rising beyond the means of consumer. The same pattern applies to real estate; housing units are no different.

On the ground

Speaking of India, Delhi's Connaught Place is the fifth most expensive office space market in the world. According to a study, the annual office space rent in Connaught Place is $157 per square foot. However, official figures show that many landlords who own thousands of square feet of restaurant space in Connaught Place are often paid monthly rents that are lower than the price of a meal in these restaurants.  The reason behind this is that norms governing renting in India are skewed in favour of the minority. Households that live in rent controlled apartments or companies that have offices in rent-controlled buildings are protected by the nt Control Act.

This may change soon, as the government is in the process of reforming these laws. The Draft Model Tenancy Act 2015 has provisions to repeal many such stringent restrictions.

Let us look into why renting is so expensive in India:

Consider this: if authorities impose a law suggesting a meal should not cost more than Rs 100, restaurants would either not prepare dishes that cost more than Rs 100, or charge a greater fee under the table. Similarly, if there is a law that gives tenants a permanent right on homes they occupy, not many units would be in the rental market. This is why the percentage of apartments rented out in 1961 declined by 70.83 per cent in Greater . In cities like Ahmedabad, Allahabad, Agra and Amritsar, too, there was a decline of over 70 per cent in the same period. The nt Control Act that was imposed around the World War-II was not repealed in India, though it was either repealed or severely eased in most major cities. 

Households that own an apartment can claim tax deductions on the interest rate paid on mortgage loans. Households that rent an apartment are not equally privileged. Further, landlords are expected to pay tax on rent they earn, regardless of their residential status. By offering tax deductions for mass rental dwelling units, the government could be able to make its Housing for All Mission a success. By allowing tax deductions for social rental stock could be another steps in the right direction. 

Floor space index of FSI is the ratio of floor area to the size of the plot. For instance, with an FSI of 3, a 3,000 square feet building can be built on a 1,000 square feet plot. Now, in South , nearly 90 per cent of the buildings have an FSI of over 1.33, while the official FSI is 1.33. At the same time, many buildings in the area are under rent control. If these buildings are redeveloped, landlords would not be able to profit from it, because the reconstructed buildings would have lesser floor space. Moreover, official rents are alarmingly low. Such restrictions make renting out properties costly in Indian cities. Many such buildings are dilapidated and, at times, collapse, killing its inhabitants. Economist Assar Lindbeck may not have been exaggerating when he said that next to bombing, the best way to destroy a city is to impose rent controls.

When homes and office buildings are under rent control, this would lower the rental stock in the market. Prices and rents are influenced by supply and demand. When supply is greater, prices will fall, and when supply is lower, prices will rise. When rent controls are imposed, few would rent out properties. This will raise unofficial rents. 

Official rental yield in India is lower than that of almost all major countries. This leads to a great number of landlords opting out of the market. As this lowers supply of homes in the rental market, rents of existing homes would rise.