Mind the gap: Indian cities need 18 million houses – even as nine million houses lie vacant

According to the Census of 2011, there are nine million vacant houses in Indian cities. At the same time, the Central government estimates that there is a shortage of more than 18 million houses. Is it not possible to halve this shortage by bringing these nine million homes to the market?

The solution, alas, is not that simple.

Let us try and break down this conundrum by looking at the reasons for this large vacancy. In pole position, and by a large margin, is the speculative nature of the real estate market in India. It is fairly obvious that investment in real estate is a key investment strategy, especially to park and regularise cash and other assets, and has been since the real estate boom following the liberalisation of the sector in the early 2000s. And it comes with fantastic returns to boot. So, for well-off people with extra cash, it has made a whole lot of sense to buy real estate, whether plots of land or apartments in any of the thousands of peri-urban developments mushrooming around our cities. The investor would also get significant social security off such an investment, in our environment of limited social benefits of citizenship.

Pros and cons of renting out

Would it not make sense for an investor to make an income off a real estate asset that is lying vacant by giving it out on rent? Yes and no, it seems, because the trade-offs are not as easy to balance. The cons include some investment in management and upkeep of the property as well as paying double the amount of property tax than what an empty house would attract, at least in most cities. It is, after all, seen as a commercial activity. In fact, if a house is converted into a paying guest or hostel, even water and electricity supply is likely to be charged at commercial rates and not at residential rates.

Added to this mix are the dreaded Rent Control Acts – state-legislated tenant protection laws that literally froze rents and halted evictions. The rent control laws were initially enacted in some states in the period between the two world wars, which were periods of intense inflation in the housing market, and subsequently in other states and provinces. Even today, large parts of the island city in Mumbai are under rent control, implying that tenants in the area may be paying rents fixed in the 1940s.

While the laws were likely quite effective in preventing homelessness in the era they were formulated in, they eventually backfired. Landlords, big and small, became increasingly disinclined to risk the asset and income value of their real estate as it became impossible to increase rents or sometimes to even recover their homes. The practice of letting out houses or accommodation started becoming less attractive as a result of these risks. The Rent Acts, thus, proved detrimental to the housing market over time, as they choked investment in the rental housing market.

Subverting the rules

For those who rent, do you know why you most commonly sign a residential rental agreement for only 11 months? Because in most states and cities, an agreement of a year or more automatically comes under the purview of the Regulation Act of 1908. This Act, and the local Rent Acts, have left an impression in the very memory of the housing market. In this are hidden two factors: one, that nobody knows that a majority of the states in the country have now revised their Rent Acts in order to rid them of the most protectionist kind of provisions; and two, the housing market has already subverted these Acts and found ways around them, such as signing agreements for only 11 months, implying that there is agreement on the part of the landlord and the tenant that the Act is not relevant to them.

In Mumbai, for example, a sitting tenant receives a pagdi – a premium amount between one to two times the market value of a house – in order for the landlord to recover the property or transfer it to another tenant. Another largely benign form of working around the Acts has been to simply not register rental agreements with the designated authorities. A survey by the National Sample Survey Office, under the Ministry of Statistics and Programme Implementation, in 2010 showed that one in six rented houses had hardly any form of written agreement at all, let alone an agreement that was registered with the authorities.

Now, looping this information back into our original question – why is there a shortage of 18 million houses and an available yet vacant stock of nine million houses at the same time? – we could surmise that a combination of rent control, local taxes and charges, and personal preferences are the reason. We could further argue that if these are somewhat rationalised, the speculative value of a residential investment could be enhanced with an income value, thereby leaving no one at a loss. Even the revenue that the government or its agencies would lose by equalising taxes and service rates for owned and rented residential buildings would likely be made up by more houses coming under their net.

Yet, it is still not that simple.

The overwhelming shortage of housing in Indian cities – up to 95% – is within the lower-income groups, that is, households that earn less than Rs 2 lakhs a year. Whichever definition of affordable housing one goes by, assuming that enabling the release of these nine million houses into the market will mean that millions of poor families will get a house is an optimistic stretch. At best, we can hope that some pressure on housing at the upper end of the market will come down, leading to a reduced capture of low-income housing by middle-income groups.

The solution

Then, what are the options for the income poor in our cities, and what can governments do to ease their housing condition?

The fact is that lower-income households and localities have already largely addressed their housing demand in their own ways – through informal housing. The key characteristic of informal housing is that it can attract and absorb diverse housing demand and supply streams. For lower-income groups migrating to cities or accessing the urban economy, informal settlements are key places for housing choices. Not only is housing more affordable and better located here, tenant-landlord relations also transcend rent laws and regulations, and services such as water are available at affordable rates through agents and groupings. Here, the tax net simply is not relevant, considering the grossly inefficient property tax collection mechanisms of most municipalities.

Some seminal studies on rental housing in poor settlements have shown that landlords and tenants actually share a mutually beneficial relationship, and far from being the exploitative capitalist, the typical landlord in a poor settlement is actually equally poor, if not poorer, than their tenant. Incremental development of housing to rent out to young families and in-migrants is, in fact, a common livelihood response of poor households.

In such a scenario, the government’s aim to increase the supply of rental housing for lower-income groups through “social rental housing “ and government-provided rental housing – the Ministry of Housing and Urban Poverty Alleviation’s Draft National Urban Rental Housing Policy, for instance – may be noble but ill-founded, at least at the moment. Instead, the government may generate better outcomes by slowly bringing these informal settlements into the formal housing market by providing basic services such as electricity, water supply, sanitation, street lighting, roads, waste management, and an enabling environment for gaining more tenure security. In fact, it may even consider using the vast tracts of its own land that are occupied by slums as “rental land”, along with service up-gradation and tenure security, to move large populations out of housing poverty.