Shanu

Union Urban Development Minister Venkaiah Naidu recently said that the government would encourage rental housing. To do this, the government wants to formulate tax norms that are favorable to landlords, and strong incentives for institutions keen on building mass rental housing projects. This is a welcome move as a large portion of India’s population cannot afford to buy houses, especially in metropolitan cities.

Here are seven reasons why Indian cities need a vibrant rental market:

In many Indian cities, a fraction of the housing units in the rental market have rents frozen by the government. This means that the government sets rents which are much lower than market rates. Regulated rents are not often periodically revised even though the value of money steeply decline over the years. So, tenants who live in rent-controlled apartments pay much lower rent than other tenants. Tenants in rent-controlled apartments are less likely to move to other apartments, even when it is otherwise in their interest to do so. This is because if they move to a different part of the city, they may have to pay an incomparably higher. This will distort labour markets. For a more perfect matching between jobs and skills, there should be greater labour mobility.

Data show that India has 11.09 million vacant houses in urban areas, while there is a shortage of 18.8 million houses. This means that the rental housing market does not do a good job of matching vacant houses with the homeless. When affordable rental housing is rare, governments are likely to spend more on building affordable houses for the poor. However, this is inefficient when many houses stay vacant. This exerts great stress on the public finance of the Indian government, but does not lead to proportionate benefits.

When rent controls exist, the rents in houses which are not under the rent-control regime are likely to be high. Why? Rent controls lower the supply of rental housing units because it is no longer very profitable to rent out houses. There is also the possibility that such houses will be encroached upon. It is possible that the tenants would prove to be hesitant to leave. When rental housing is more expensive, intercity migration would be low. Moreover, there would be less migration within a city. This will raise commute times, leading to traffic congestion. The need for building infrastructure will also be greater, in the periphery and suburbs.

In most developed countries, rent controls were either abolished, or replaced by second generation rent controls that are mild. This is yet to happen in India, though rent controls were introduced during the first or Second World War in most countries. As legislations are not periodically revised, migration to many Indian cities have declined since the 40s. Relative to income levels, some Indian cities have nearly the most expensive housing in the world. In South India, for example, rental housing stock is greater, and rent controls is part of the reason. Rent controls and the high cost of housing are certainly one of the reasons. Moreover, when renting out houses is not an option, it is unlikely that people will invest much in housing itself. This will make housing more expensive. In fact, rent controls is an important reason why there is such a huge mismatch between personal incomes and housing prices.

When there are rent controls, there will be a vibrant unaccounted market in rental housing. As such markets are outside the ambits of law, landlords are less likely to be law-abiding citizens. Tenants are likely to be mistreated by landlords, and evicted at whim. Unaccounted market attracts a particular sort of landlord who does not care much for laws that govern the society. Often, there is an uneasy relationship between such landlords and tenants.

Landlords of rent-controlled buildings are unlikely to upgrade their buildings because there is no profit in it. Home owners are likely to renovate their houses and ensure that utilities work properly when they benefit from it. Under rent control, this is not true. Even when a building is not rent-controlled, landlords do not have much of an incentive to upgrade it because there is very little competition. Tenants are used to living in cloistered spaces in dilapidated buildings.

When many people are waiting to get in, landlords can easily afford to discriminate, triggering greater discrimination against certain social groups. When rents can be set by mutual agreement, landlords can segregate tenants according to the price they are willing to pay. But, when landlords cannot segregate tenants according to the rents they are willing to pay, other factors will play a much larger role. In fact, much of the discrimination in rental markets that the media reports have more to do with rent controls.