How Rent Control Acts are responsible for India’s housing crisis

Housing is treated to be one of the essential necessities for self-realization of one’s potential. It affords numerous benefits like protection from the weather, sense of security, comfortable environment, hygienic conditions and privacy. For these reasons, all persons acting in self-interest seek to avail some form of shelter that they can afford with the resources available to them. However, housing is often expensive and due to a scarcity of resources (in terms of income) available to each individual, one would always seek to maximize his utility by acquiring the best possible accommodation at the cheapest cost. In India, which continues to be a lower-middle-income economy, affordable housing can be a problem due to reduced spending potential of the population. This acts as an institutional barrier translating into either in poor housing conditions such as living in a slum or overcrowding such as living in shared apartments.

Given that the market has not produced the expected results that guarantee housing for all, the government in India has intervened with legislation such as Rent Control Acts in various states. These Acts seek to artificially lower the rent through a government defined standard rent and restrict the rights of the landlords to evict the tenants. Thus, they can be seen as enabling institutions to allow access to affordable housing for low and middle-income consumer groups. However, a neoclassical analysis tells us a different picture, what can be enabling institution in theory, can very much turn out to be a disabling institution in practice.

The artificially lowered rent increases the demand in the market because what was previously unaffordable is made affordable by government intervention. Given that the houses are not being constructed and put on rent at the same pace, the supply side remains the same. Thus, there is an upwards pressure on the existing infrastructure. Further, the prospects of lowered rent often attract migration to rent control areas. At the same time, the lowered prospects of getting better rents disincentivize the landowners from putting the property for rent or invest in the upkeep of their property. In the long run, it results in black-marketing, poor infrastructure growth and unnecessary administrative cost for the government in terms of implementation and litigation.

The result in cities is that Mumbai has a high house ownership rate of 95% but low tenancy rate of 5% and faces an extensive cluster of slums in urban areas. In the capital Delhi, the Courts are being burdened with adjudication of cases where expensive properties have monthly rental of merely $14/- resulting in overall neglect and crumbling infrastructure.

Today, India faces a shortage of more than 18.78 million homes. In order to tackle the problem, the government has launched PM Awas Yojana where it competes in the market for building affordable houses. But the input cost of land often forces the government to provide unattractive accommodation in far-off places. In effect, rental housing still continues to be a preferred option due to its locational advantage. Thus, in order to fulfill consumer expectations and provide affordable housing, the focus has to shift to reforming archaic laws. Earlier this year, the Delhi High Court dismissed a petition challenging the validity of the Rent Control Act. Even though the Courts might not be the most appropriate forum to question the economic rationality of an Act, it certainly calls for the legislature to look into the purpose and function of the Act. Hope better sense will prevail.

Image Source: Wikimedia Commons

Anuj Aggarwal

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