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Cracks are showing in the housing market. Reforms are way to go

A drastic course correction in land-use policies is called for that focuses less on restrictions and more on performance.

Moneycontrol Contributor @moneycontrolcom

Vaidehi Tandel, Isalyne Genarro, and Mehul Das

The Union Budget offered little solace to the real estate and housing sector, which has been stagnating. This is a problem, given the sector’s deep links with upstream industries, and its role as an employment generator.

In general, government policies have been designed to narrowly address affordable housing issues as if this sector exists completely independent of the larger housing market. In fact, existing housing policies and regulations in India are responsible for keeping housing out of reach for large sections of urban residents — and are thus contributing to the sector’s stagnation.

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According to a recent Economist Special Report, housing policies implemented across rich countries have resulted in dysfunctional housing markets. This has jeopardised their economies by affecting productivity of cities and workers and contributing to growing inequality. Indian states and cities have followed in the footsteps of these countries by implementing policies that have effectively curtailed supply. What we are witnessing in the West should be a warning to change the current business-as-usual mindset.

In his book Triumph of the City, US economist Edward Glaeser states that “Indian cities have so far embraced the worst aspects of English land-use planning, leading to short buildings and dispersed populations.” The statutory Master Plans or Development Plans control the extent and nature of urban growth. They also prescribe uses for different land parcels (residential, commercial or mixed uses) within cities – a policy known as zoning. Other instruments include restricting building heights or prescribing ‘green belts’, which are bands of green zones outside cities that cannot be built upon.

The ostensible aim of these policies is to control population growth and high densities, and reduce stress on infrastructure. Instead, they often distort the urban land market and make housing supply less responsive to growing demand. Designing cities through restrictive land-use policies impacts the quality of life of urbanites significantly. Our slums are proof that governments cannot prevent rural to urban migration.

Perhaps the most ham-fisted policy tool used in Indian cities is having low permissible building heights and unvarying free Floor Space Index (FSI). Indian cities have among the lowest FSI limits in the world. Land-constrained cities such as Mumbai should build vertically to increase available floor space as urban population grows. But constraining how much can be built makes formal housing unaffordable and pushes low-income households into slums, or forces people to shift farther away from their jobs to access cheaper options. In central areas, it forces people to consume less space resulting in more crowding and cramped conditions.

The supply of housing is also hamstrung by building standards such as minimum width of internal roads, staircases, marginal open spaces, parking requirements, and limited ground coverage area. But Indian planners do not quantify the costs that these mandatory standards impose on developers, residents and cities as a whole. A study by Patel, Byahut and Bhatha estimated that relaxing the state’s development control regulations can lower construction cost by 34 percent and increase the number of units by 75 percent without reducing safety or drastically lowering design quality.

Not only do policies make it difficult to build, but also make it harder to rent. Strict rent control laws and weak enforcement create disincentives to rent out. In India, rental housing rates fell from 54 percent in 1961 to 28 percent in 2011. This has its downsides -- in particular, low labour mobility since workers are less willing to move for a job once they become homeowners.

A forthcoming Brookings India working paper by Datta, Gandhi and Green shows that states having low homeownership rates in urban areas are associated with greater mobility of people. Rental housing is often the only option available to new entrants in a city. Encouraging rental housing, therefore, is essential for cities to continue to remain productive and attract skilled workers to live there at affordable rents.

An IDFC Institute report on housing provides pathways for improving the functioning of housing markets in Indian cities. In particular, it argues for revisiting regulations more frequently in order to adapt to changes in socio-economic conditions. It also makes a case of relaxing rigid rules on what and how much can be built and eliminating superfluous building standards and bye-laws. Together, these reforms will optimise utilisation of scarce urban land, reduce costs of construction, and increase the amount of affordable residential floor space.

Furthermore, states should replace existing rent control acts with the central Model Tenancy Act and frame policies that make it viable to provide and operate rental housing at scale as a commercial business in order to provide a fillip to rental housing. These reforms, in turn, will make provision of public housing more effective since it can be targeted narrowly to the weaker sections that are priced out of the market.

Averting a fate that has befallen cities in the rich world today requires our politicians and governments to undertake a drastic course correction that will involve focusing less on restrictions and more on performance without distorting housing market outcomes.

Vaidehi Tandel is Junior Fellow, Isalyne Gennaro is Associate, and Mehul Das is Co-Lead, Programs and Senior Associate at IDFC Institute. Views are personal.

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First Published on Feb 20, 2020 11:59 am
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