Should Municipal Corporations Rate Real Estate Developers?

Home buyers sometimes are not sure that real estate developers will deliver their flats on time. Developers who prove themselves to be trustworthy over a long period of time have an easier time winning customers. To prove that they are trustworthy developers are often made to jump through many hoops by urban local governments and various government agencies. For example, developers are expected to adhere to building codes and zoning regulations.

It cannot be denied that building regulations weed out many unscrupulous developers.

The Brihanmumbai Municipal Corporation (BMC) plans to rank developers in Mumbai according to their track record. The BMC will also rank architects based on their completed projects, and the extent to which they abide by building codes and regulations, and make such information available to the public. Information, of course, helps home buyers if it is collated through a fair and transparent process. Even if urban local bodies do not rank developers and architects, private firms step in to make such information available. For example, real estate portals do this to some degree. Home buyers do not have perfect information on the credibility of builders, and hearsay is often not enough to take an informed decision.

But building codes also hinder innovation and make housing more expensive. Even in the United States, building codes make housing more expensive by about less than five per cent of the cost of housing. In India, taxes and regulations form a significant fraction of the cost of housing. To know whether building codes are effective or not, we need detailed studies on the cost and benefits of having a building code. No such study has so far been done in India. In Florida, US, building codes were imposed in 1992. But, when a study was done later to find out whether the buildings built since then were safer, there was no evidence to that effect.

Why does this happen? The common assumption is that home buyers have to rely on public perception if the government does not certify builders or architects. This, of course, is not an entirely reliable way of finding out whether a builder is credible or not. But when government agencies certify builders, there is a tendency to blindly rely on official rankings. This may also raise corruption, as builders are forced to bribe government agencies at every stage of the construction process.

The BMC, for example, does not intend to rank developers and architects according to their previous track record. It will only look at ongoing projects. This might intensify the pressure on developers to please authorities, regardless of their track record in the past. Besides, this could place a reputed developer on the same level as that of an unscrupulous one. It will be difficult for a consumer to differentiate between a developer with a track record of credibility for so many years and an unscrupulous one that knows how to play the system.

Such information is very useful to home buyers if done fairly and objectively. But, even then, there are inevitable constraints. It is impossible to quantify the performance of a builder without freezing standards. For example, building codes are a way of freezing standards. It is true that many norms stipulated by building codes are useful in certain contexts. But, we live in a world where innovation takes place at a fast pace. When you freeze standards – regardless of how objective this may seem – innovation is less likely to take place.

It is true that in the absence of official rankings, customers will have to exercise their judgement while choosing the builder. This is not necessarily a flaw. Such choices and judgements make the market system work reasonably well, despite all its flaws.

Economist Milton Friedman once said that even if the market provides information insufficiently, this does not justify anything more than the government supplying the missing information. So, the BMC's rankings, despite all their flaws, may act as a competing form of assurance to home buyers.