Using Luxury To Make Housing Affordable

Global luxury brands are increasingly entering India's real estate markets. Among them is Italian fashion major Versace, which will design the interiors of a 32-storey skyscraper in South Mumbai.

While the race to enter India's lucrative real estate market continues, developers who cater to the luxury segment are often criticised for building only for the elite. However, the only reason why this should worry people is that there is a shortage of affordable houses and mid-income rental units in South Mumbai.

There is nothing wrong with developers catering to high-income home buyers, but policy changes are required to ensure developers do not cater to the wealthy alone in cities like Mumbai. There is a shortage of valuable urban land in central areas of Mumbai. Unless the authorities unlock idle land owned by various government departments, or allow developers to build taller buildings, the only way for people to build more floor space is through building densely in the slums. As this is so, the wealthy will compete with mid- and lower-income households with floor space. When a high-income, wealthy minority competes with the large majority of low and middle-income households, it is inevitable that most people will live in unbearably congested houses.

However, this is by no means immutable. If developers are building luxury houses and not enough low- or middle-income houses, what does this mean? Developers work under enormous constraints, and within those, it is not easy for them to build enough houses for people across income levels.

Local authorities, governments and various agencies, for example, can give quick approvals for more affordable housing, and densely built mid- or low-income projects. Similarly, authorities can repeal various restrictions that prevent the construction of low-income houses, including the upper limit on the floor space that developers can construct on a certain plot. Authorities can also repeal the minimum requirement for parking spaces and other requirements that make housing unnecessarily more expensive in a country where the rate of car ownership is very low.

Now, is luxury housing an enemy of affordable housing?

Luxury housing can, in fact, attract more high-income individuals and wealthy tourists to South Mumbai. When more high-income households enter Mumbai, economic activity and the level of trade in the city will intensify, raising productivity and incomes. This will make income levels rise to the point that people can more easily afford housing in Mumbai.

When there is new housing in Mumbai, for example, there will be less pressure on households to renovate old houses and sell them to high-income individuals. When this happens, once expensive houses will be sold to mid- or even low-income households.

How? At present, as housing is very expensive in Mumbai and because construction of floor space is almost illegal, people are not likely to sell an old house to a low- or mid-income household. They are more likely to renovate such a house and sell it for a much higher price. When construction of floor space is permitted, they have much greater incentive to sell it to households with low income levels.

In fact, in large cities where the government allows construction of floor space easily, expensive houses tend to reach mid-income or even low-income households in the long run, in the resale market. This is especially true for well-functioning housing markets. This does not, of course, mean that expensive houses in prime neighborhoods like South Mumbai tend to reach low-income households. When developers are allowed to construct floor space without restrictions within a neighborhood in the resale market, households with lower income levels can buy houses that were once not within their reach.

Besides, luxury housing increases the supply of floor space; when supply rises, prices tend to fall. Even though it is true that many high-income households are not willing to move to smaller houses in the resale-market cities like Mumbai, it is still true that average floor space consumption rises every decade, even in Mumbai. But, this has not happened in Mumbai's central areas, where developers are compelled to build luxury units to recover their costs. For this to change, the government will need to set developers free.