How Market Makes Housing Affordable
Making housing affordable is being taken up as a national agenda across the world, and India is no exception. But that is not how the real estate world works. It's market forces that usually decide property prices and rents, and that is true even when the government is building houses. Governments' subsidised housing schemes, in fact, seldom cater to the needs of the poorest; most people pay market rates.
With the exceptions of Hong Kong and Singapore, governments have rarely been successful in running their housing programmes. But these two are a couple of prosperous cities known for extremely low levels of corruption. So far as Hong Kong is concerned, its real estate is among the most expensive in the world, despite it being a well-planned city. And, even in this land-scarce city, government interventions have led to misallocation of land. There is a lot that India can learn from such experiences.
The policies governing management of urban land in India are only but a pale shadow of the unprecedented growth the country's economy has experienced since the early 1990s. Liberalisation seems to have had little impact on India's land markets. Even today, 70 per cent of employment generation takes place in cities and the very motive of urban planning in India remains limited to decongestion of cities.
It's true that India is one of the fastest-growing cities in the world today, but much of that growth sits in cities alone. So, it is imperative that its cities should be able to handle the extra burden. But the floor area ratio (FAR) in central Mumbai was lowered from 4.5 to 1.33 in 1991, even as authorities in most developed countries have been raising FAR to accommodate their rising urban population.
Given the constraints, building houses for everybody here may take more than a generation, even in the best-case scenario. On the other hand, if real estate markets were to become more efficient, housing would become more affordable.
But India also faces another difficult challenge. Even if the country becomes more prosperous, millions would still live in informal houses. So, won't it be best to allow that to happen? If the government allows the market to perform well, it will be able to cut down on its subsidies.
In the words of Alan Bertaud, an urbanist and a senior research scholar at the NYU Stern Urbanization Project, slums are not an inevitable consequence of urban growth. Vietnam, for example, is as poor as India. Even as Vietnamese cities are growing twice as fast, slums are far less common there. As for India, its growing slum population is difficult to explain. Population growth and poverty cannot be a tenable explanation for the wide presence of slums.
The Vietnamese cities do not impose India-like restrictions on real estate development, and that is true of many other countries as well.
The supply of land in Indian cities varies widely. While there is a shortage of developed land in major urban centres, land-use policy and building regulations only lower land supply further. Since land is usually not developed according to market forces, housing becomes even more expensive.
Indian cities might have been more efficient if they used their land in the best manner possible. For example, there is a strong incentive for developers to build skyscrapers in Delhi's Connaught Place. But since authorities would not allow them to do so, they would build skyscrapers elsewhere. And that would make Delhi real estate generally more expensive.
Land owners want to use their land for ventures that seem the most profitable to them. But that cannot happen if the government decides what to build, where to build, and how to build.
A few decades ago, Hong Kong, China and Singapore allowed urban population to grow, without forcing people to live in slums. China and Singapore at that time were poorer than India is today. So, that proves it is possible, so long as the market functions efficiently. Even so, slums are not intrinsically bad. If the economy is free, the households that live in slums today will soon move to decent houses.
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