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India Needs a Formal Rental Market for "Housing For All By 2022" to Succeed

Aug 31, 2016

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Trying to rent a house is one of the most nerve wracking experiences one can go through. I have gone through it in three different cities (Mumbai, Pune and Hyderabad). The way the landlords look at you with pity, is a scene straight out of the movies. It's like their way of telling you, what you haven't even been able to buy a house? You loser, look at me.

Having found a house and then trying to handle the landlord on a regular basis takes your diplomatic skills to another level (I used to have a landlord once who used to land up every Saturday morning asking for stock tips and then spend a good three hours badgering me for them).

The entire system is built against anyone who wants to live in a rented accommodation or cannot afford to buy a home unless he moves so far away from the city (I am talking about the bigger metropolitan cities here) that the rest of his life is spent commuting to and from office.

The interesting thing is that the rental share of urban housing stock has gone down over the decades. As per the 1961 census it was at 54 per cent and by 2011 it had fallen to 27.5 per cent. This explains why finding a house on rent can be such a pain.

The proportion of homes on rent has fallen dramatically over the years. This as urbanisation (or the number of people living in cities) has gone up. As per the 2011 census 31.2 per cent of the population lived in urban areas. This figure is expected to go up in the years to come.

Rental share of urban housing stock in India has progressively declined with urbanisation

The fall in rental housing stock is a worrying trend. A major reason for this has been the rent control acts which are in operation in various cities across India. As KPMG points out in a research note titled Decoding housing for all by 2022: "Rent control policies aimed at protecting tenants have had their consequences of deterring investments in rental housing in India, causing the share of rental stock to decline from 54 per cent in 1961 to 27.5 per cent in 2011 which drove EWS/LIG households into slums." (EWS = economically weaker sections. LIG = lower income groups).

In fact, as the Tenth Five Year Plan Document (2002-2007) points out: "The Rent Control Act, in fact, is the single most important reason for the proliferation of slums in India by creating a serious shortage of affordable housing for the low income families. Low and middle-income families typically live in rented accommodation all over the world and the need for such accommodation in our cities will only increase as the economy modernises, labour mobility increases and urbanisation takes place." Further, India's urban rental housing stock is low as per global standard.

The rent control acts lead to a shortage in rental housing in various ways. As the Five Year Plan document points out, it leads to: "Negative effect on investment in housing for rental purposes. • Withdrawal of existing housing stock from the rental market. • Accelerated deterioration of the physical condition of the housing stock."

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Another impact of rent control is to give Indian cities a shabbier look in comparison to cities in other developing countries. With the tenants living under rent control, the landlord has no incentive in renovating the buildings. Just one walk around South and Central Mumbai tells us that very clearly.

In fact, Mumbai has had to bear the brunt of the rent control act. As Sahil Gandhi, Vaidehi Tandel, Shirish Patel, Abhay Pethe, Kabir Agarwal and Sirus J. Libeiro point out in a working paper titled Decline of Rental Housing in India: A Case Study of Mumbai: "There has been near universal consensus that rent controls of the kind seen in Mumbai, known as "first generation rent control", have a devastating impact on rental markets and, in general, housing and land markets in cities...Rent control in Mumbai has been particularly damaging for the housing market, which is characterized by ownership dwellings constructed mainly for the upper middle class on the one hand and a high incidence of slums housing the majority of the population on the other."

The point is that if the government's mission of "Housing For All by 2022" has to become a reality then rental housing needs to pick up in a big way. What is needed first and foremost for this dream to become a reality is a new rental law which is balanced "in favour of both the tenant and the land-lord could be drafted by the central government." As KPMG points out: "A balanced rental law could help with the development of a formal rental market in India, and to some extent improve occupancy of the unoccupied houses estimated at about two crore."

A new rental law put out by the central government will be the starting point. It will then have to be adopted by the state governments. At least that way some of the locked and unoccupied homes will start hitting the market.

But will that lead to Housing for All by 2022? Only a little. The shortage in housing is at the lower end of the spectrum, as can be seen from the following table.

Housing Shortage in Urban India

The unoccupied homes are more at the upper end.

Hence, for rental housing at the lower end to take off, the rental yield on homes needs to improve. This will only happen once prices come down to more realistic levels. Currently, the rental yield is around 2-3 per cent (the annual rent as a percentage of market price). Nobody in their right minds is going to build homes for rent with a rental yield like that. For rental yields to go up, the cost of constructing homes needs to fall. For this to happen, first and foremost, the cost of land in and around cities needs to fall.

For the cost of land to fall, the government needs to increase supply. This can be done by increasing the FSI allowed on buildings. Further, the government needs to increase supply of land by trying to sell some of the land that it owns in and around cities, land that it inherited from the British colonial administration.

These will be the first few steps towards Housing For All By 2022.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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6 Responses to "India Needs a Formal Rental Market for "Housing For All By 2022" to Succeed"

Rohit

Sep 3, 2016

I rented my row has, tenant defaulted constantly on rent, I terminated registered agreement but he wont vacate, my agreement expired, still he didn't. I went to Police but they refused, siting civil matter, I went to Competent Authority for Rent Control. It will take 1 year for vacating n then I have to to Civil Court for recovery. I will never now rent out my flat or Row Hse.

The rent control act is very difficult to implement very skow

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Ajay Manwar

Sep 1, 2016

These will be the first few steps towards Housing For All By 2022. HOUSING FOR ALL BY 2022.
IF THE ABOVE QUOTATION becomes REALITY by YEAR SAY 2025. WHAT WILL BE THE FATE OF INFRASTRUCTURE INDUSTRY and BUILDERS and DEVELOPERS.
As per my knowledge and study our "Housing for ALL" has only slogan value.
It seems Everybody is making efforts and busy with fooling INDIAN general public.

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ANIL GUPTA

Sep 1, 2016

Dear Mr.Kaul, You have rightly suggested that to lower the cost of land FSI be increades. In this connection I wish to add that as per UN Population report Indian population is likely to overtake China's by 2022. And as per current rate of population growth, presumably 1.6% per annum average growth, we are already 132 crores and will cross 150 crores by 2026-7.If we grow horizontalyy agricultural land will have to be diverted to towns.But this may jeopardize our foodgrain production.So, we have to move vertically only.Before any construction load bearing capacity of the soil should be compulsorily tested. And maximum FSI that can be withstood by the earth be permitted. We have to follow the example of Singapore. Then only we can survive.

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pradeep

Aug 31, 2016

Dear Mr. Kaul,

I find most of your articles interesting but you don't seem to know how the Rent Control Act works and has been already modified to balance between the landlord and tenants interests. There is a system of "Pagdi " in which the landlord legally charges and earns anywhere from 30 to 50% of market value of property on each sale of an apartment from one so called tenant to another. So all those so called tenants who are actually co-owners, have become tenants of pagdi properties have paid this "pagdi" to become mere tenants plus have paid paid balance market value at a some discount ( due to the fact that this new tenant too would have to again pay pagdi to landlord, were he to sell his tendency to a new tenant) to the outgoing tenant. And despite paying humungous amounts in lacs and crores, a tenant can be evicted without receiving any compensation ,if the landlord needs the property for his bonafide use !! The only trade off being, that having paid this pagdi , the tenant then pays small rent as anyway he has paid a big pagdi amount on which a landlord earns handsome interest.. So this tenancy is heavily loaded against a tenant . So please don't get confused between pagdi tenancy and leave and licence where one pays a small deposit only and then pay a larger rent and is not covered under Rent Act. So without understanding the inticracies of Pagdi Tenancy to make laws which will be disastrous to tenants, who have paid lacs and crores of rupees as pagdi, will not only be unfair to pagdi tenants and also making biased law in favour of landlords of pagdi properties and not make a balanced and fair law, which will be mired in litigations for generations to come ! In your quest for a house in the city hope you are not proposing to deprive other legal tenants, who are actually co-owners, of their rights ?

Reg.

Pradeep.

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LK BEHERA

Aug 31, 2016

VERY INTERESTING AND EYE OPENER ANAYSIS.
I LEARNED TOO MUCH.LET ME TAKE A HEAVEN REST TO DECIDE WHAT'S CORRECT ?
LK BEHERA

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R Tayal

Aug 31, 2016

Dear Vivek, Housing is no doubt a major issue in India. However, your analysis has a few gaps : 1) My interpretation is by "housing for all", what the govt means is ownership of houses and not just living in a tenanted pucca house. One can question whether that is the "Right" objective (after all, the seeds of 2008 global financial meltdown were laid by an earlier similar policy pursued in the US). So looked at from the govt's objective, changes to the rent control act proposed by you have at best a marginal impact. 2) Your interpretation of "rental stock decline" is selective. It could also mean (to some extent) an increase in the percentage of house-owners at an aggregate level. 3) True, the present rent control act is too skewed, and does need some changes. However, the root cause is slightly different, which is the lack of character among Indians in general. Neither the tenants are devils nor the landlords angels (or even vice versa). It is just that whoever gets an opportunity, takes undue advantage of the other. So legislation can have some impact but can't be regarded as a panacea.

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