Do Minimal Standards Cause Housing Shortage?

A European architect once told novelist-philosopher Ayn Rand that modern housing could do much for the Puerto Ricans who lived in squalid houses. It would be nice to have electric refrigerators and tiled bathrooms, he felt. But when she asked who would pay for those, the architect did not have an answer. This is true of minimum housing standards, too. It is nice to have houses that meet certain standards. But this does not mean that imposing minimum housing standards improves the quality of housing.

It is true that good housing standards are important for growth of cities. In developing countries like India, the urban poor often settle in centrally located slums. Such houses rarely meet the minimum standards set by governments. This is not very bad.

Poor households are not willing to live in areas where jobs are difficult to find, because they find transportation highly expensive. The only way they can live at the centre of a city is by living in dense, poor-quality houses that do not meet the government's minimum standards. They usually spend more per square foot than the rich. But they still find cheaper houses because their houses are very small. In Dharavi, for instance, a shanty may cost anywhere from a few lakh rupees to over a crore. But this is still considered cheap housing. Poor households can buy a formal house with the same amount of money only 50 kilometres from the heart of Mumbai. As jobs are difficult to find in such areas, even if they are offered formal houses for free in such areas, they might decline.

Housing standards are imposed to ensure that people live in houses that meet certain standards. But in reality, this is not what happens. Dozens of millions of houses do not meet the government's standards of formal housing. Such houses are classified as informal. When the government imposes minimum housing standards, building formal houses also becomes expensive. The poor find getting regulatory approvals forbiddingly expensive.

When the government classifies a house as informal, it is difficult to sell the property. It is difficult for low-income households to turn it into capital and move up the income ladder. It is difficult to use such property as collateral while, say, applying for a housing loan. In an ideal world, it is perhaps true that the houses not meeting minimum standards will not exist. But we do not live in such a world. Imposing minimal standards do far more harm by condemning low-income households to a life of poverty in congested houses.

Such houses remain congested because it is expensive to renovate them. People who live in informal houses may be willing to renovate them at their own expense, but because they do not have the security of tenure, they are not sure when they will be evicted. They are also unable to sell it. Even if they have clear property titles, the poor will find it difficult to sell property because the process is time-consuming and requires expertise. Not having legal titles makes the process even more complex.

Ideally, such units should have been traded in the market because informal houses are built on very small parcels of land. Assembling small parcels is very important. Redevelopment of real estate assets is difficult without assembling many different parcels. So, in many developing countries, real estate projects are one-off developments. This is not enough. Large-scale projects can benefit enormously from economies of scale. For example, it is much easier for a real estate developer to build necessary infrastructure on a large plot because the fixed cost to build infrastructure is spread over a large area. It is also easier for developers to hire foreign expertise when the project is built on a large parcel of land, because the benefits justify the cost.

High-rise developments need not only large parcels of land but also great expertise. Such expertise is lacking in developing countries, and this makes housing projects even more expensive. This is why high-rise buildings in India predominantly cater to mid- or high-income households. This is not because high-rise buildings are inherently expensive, but because such buildings become cheaper only when buildings are very tall.

It is important to note that it is not the poor condition of such houses that harms low-income households the most. It is their informal status that is more of a barrier. The government does not provide water , sewerage and other services to slums and other areas where there are informal houses. Low-income households do not have much of an incentive to build such infrastructure themselves because they may lose the security of tenure at any moment. Besides, there is a possibility that the government might grant them legal status and build infrastructure at some point. Many people migrate to slums in Mumbai in the hope that they might be given security of tenure at some point in the future.

To make housing affordable, apart from removing regulatory barriers and allowing the construction of primary infrastructure and transportation networks, the government should also allow the existence of houses that are in a poor condition. Such houses do exist and will exist, so long as the society is poor. It is pointless to remove such houses from existence.