Flexible Rental Laws Can Fix Broken Indian Cities

Some of the largest slums in the world are in Indian metropolises. Shanties in slums cost far less than formal settlements in the same locality. Although most people who live in slums pay land rent, slums do not fall under the ambit of rent-control laws. In fact, one of the biggest reason why slums have mushroomed is that rent controls have made leasing property so unprofitable that there is a shortage of cheap, rental housing in the formal sector.

Union Urban Development Minister Venkaiah Naidu recently said that renting was more inclusive than ownership. But, the government's focus has always been on the latter. Though there is a shortage of nearly 19 million houses in urban India, over 11 million houses remain vacant. If these houses stay vacant, this means that the landlords do not have much incentive to rent them out.

Naidu said the rental laws, low rental-yield, poor maintenance, poor construction quality, fear of losing control and emphasis on ownership were the major reasons why houses were vacant in urban India. Anyone who understands India's rental markets will agree with him when he says that 11 per cent of total housing stock in India is in the rental market, while it is as high as 35 per cent in the Netherlands, 31 per cent in Hong Kong, 23 per cent in Austria and 20 per cent in the United Kingdom. If renting is cheaper than owning, why only a fraction of houses are up for rent in India as compared to the West?

Among researchers who study the effects of rent control, there is a near-unanimous agreement that rent control laws lower the supply of houses traded in the market. Reason: When the government stipulates that landlords cannot set the price higher than the rate decided by the government, people are not willing to give their houses on lease. This is not surprising when we look at metros like Mumbai where the rent of rent-controlled apartments can be as low as 1/1000th of the market rent. In some restaurants in Delhi's Connaught Place, the price of a decent meal is higher than the monthly rent they pay. Even though many believe that rent controls are intended to protect the interests of low-income tenants, tenants have much higher incomes than their landlords in many such cases.

Getting old

Rent controls are relatively new. They were imposed in many countries during the First and Second World War. Over the next few decades, rent control laws were made flexible and urban local authorities and state governments raised the FSI to allow redevelopment of buildings. (FSI or floor space index is the ratio of floor space built to the area of the plot. With an FSI of four, developers can build a 3,000 square feet building on 1,000 square feet plot.) As there is a greater demand for floor space in big cities, house owners are being encouraged to build more floor space.

In Indian cities, when FSI regulations were imposed in large cities, the existing FSI was often higher than the regulated FSI. For instance, in south Mumbai, the existing FSI of buildings is four for nearly 66 per cent of buildings. Ninety per cent of the buildings have an FSI greater than 1.33, though the regulated FSI is 1.33.

What has rent controls wrought?

The greatest growth in rental housing stock from 1961 to 2011 was in Vishakhapatnam at 106.62 per cent. Vijayawada comes next, at 14.01 per cent. Madurai had the third highest growth, at 2.24 per cent. But, behind it is Mysuru, where it declined by -3.65 per cent. In Greater Mumbai, the decline was -70.83 per cent. This is one of the most underrated facts about housing in India.

In cities like Mumbai, landlords do not renovate properties because the rentals they earn are too meagre. As it is difficult to evict tenants, deaths are common when dilapidated buildings collapse. This is why in 2005 Mumbai floods, rent-controlled buildings were worst affected.

Similarly, as submerged Chennai battles heavy rains, people who live in old buildings or had encroached upon drainage, are the worst affected. Such deaths could have been prevented, if there was a large supply of houses in the rental market. In fact, rental housing can fix the broken Indian cities. As an economist once said, the best way to destroy a city, other than bombing, is to impose rent controls.