The Paradox of India’s Vacant Houses

by on May 4, 2017 at 8:51 am in Economics | Permalink

Walking around Mumbai I see many vacant houses and apartments and the statistics verify what I see on the ground, an astounding 15% of Mumbai’s housing stock lies vacant. In Mumbai, the slums are full but thousands of homes lie vacant. The share of vacant housing in Mumbai is only slightly higher than the national average of 12% (In comparison, the United States has a vacant homeowner rate of less than 2%.) Sahil Gandhi and Meenaz Munshi, two of my colleagues at the IDFC Institute, examine the paradox of India’s vacant housing:

Urban India has a severe shortage of housing, yet Indian cities have many vacant houses. According to the census of India 2011, out of the 90 million residential census units, 11 million units are vacant; that is about 12% of the total urban housing stock consists of vacant houses.

Gandhi and Munshi focus on two issues. First, government built housing is shockingly underused. In one centrally sponsored housing project in Delhi, for example, the government built 27,344 units and 26,288 lie vacant! Government housing has often been built far from jobs and public transport and in some cases the houses have been of low quality and lacking basic infrastructure. As the government acknowledged:

“In spite of the continuous efforts by the government, slum dwellers are reluctant to move to the houses built by the government due to lack of proper infrastructure and means of livelihood,” the statement to Parliament said, explaining further that the new houses often lack electricity and water, cheaply available–often through illegal connections–in slums. The new houses are usually not close to workplaces, the ministry acknowledged.

People living in India’s urban slums have often preferred to stay living in the slums rather than move to government built housing–which is really saying something.

Government built housing, however, is only a small part of the housing stock. The bigger problem is that owners of private housing would prefer to see their housing capital lie vacant than to rent.

Renting out a property is a risky affair in India due to perceived (often, correctly) difficulties of evicting tenants, particularly under the onerous regulatory framework of the various rent control laws that are still applicable across states in India.

….These laws fix rent for properties at much below the prevailing market rates and make eviction of tenants difficult. As a result, they increase perception of risk and distort incentives for renting. To get around this, leave and licence agreements are being used as an alternate legal mechanism to rent properties. Despite this, the legacy of rent control and policy uncertainty creates reluctance to rent. To provide an example of policy uncertainty, in 1973 the Maharashtra government brought the then existing leave and licensees contracts under rent control (Gandhi et al 2014). Instances like this have had an adverse impact on the confidence of investors and landlords.

As I pointed out in A Twisted Tale of Rent Control in the Maximum City it can take courts decades to resolve legal disputes, especially those involving land and tenancy so this further disincentives rental housing.

As Gandhi and Munshi note, the problems in the housing market exacerbate probems in the labor market (just as in the United States):

Without a vibrant rental housing market labour markets cannot function efficiently (see Shah 2013). Bringing the private vacant housing stock into the rental market and understanding and resolving the reasons for vacancy in the government provided stock could significantly improve efficiency in utilising available stock of housing.

See Gandhi and Munshi’s blog post and a forthcoming IDFC report on housing for more details.

1 Slocum May 4, 2017 at 9:01 am

I’ve read of similar problems in San Francisco:

http://kalw.org/post/growing-number-san-francisco-landlords-not-renting

2 Trevor May 4, 2017 at 10:00 am

“… the onerous regulatory framework of the various rent control laws ..”

So government intervention into markets distorts supply/demand/prices… making the common people worse off. What a surprise.

Socialists/Progressives/Keynesians never learn this lesson, but re-double their faith in “experts” running an economy.

3 BC May 4, 2017 at 10:28 am

Actually, a lot of left-leaning economists (in the US at least) accept that rent price controls will cause landlords to drop out of the market. For some reason, though, they don’t accept that health insurance price controls will cause insurers to drop out of the market or that prescription drug price controls will cause drug companies to drop out of the market.

4 Troll Me May 4, 2017 at 11:09 am

Try to keep in mind that this is a rather extreme example. For example, situations that are 1% as extreme as this may in fact b every reasonable, whereas this 100 times more extreme situation is absurd.

Maybe not comparable for purposes of forming general judgments about all things rent control.

5 JMCSF May 4, 2017 at 10:51 am

Definitely a problem in SF. Most landlords only own a few properties, renting out the in-law unit or lower unit in their townhome. Its not uncommon for people to just leave this empty, because the consequences of getting a bad tenant they can’t get rid of is even worse when its somebody in your own home (or directly below your home in a two unit building). I have heard that the property value of a building is actually higher without a tenant in it, so its understandable that people leave them empty.

Sadly, I have started to see talk of a vacancy tax on units that are not occupied.

6 rayward May 4, 2017 at 9:30 am

My understanding is that before British rule there was no formal individual ownership of land, and that “reform” continues to evolve. Who owns what I suspect contributes to the problem identified by Tabarrok, but the irrational government regulations Tabarrok refers to were in response to the feudal and highly exploitative system that prevailed (and that continues to prevail). Tabarrok might argue that the cure (regulation) is worse than the disease, but that depends on which disease one might have.

7 shrikanthk May 4, 2017 at 9:47 am

I like slums. They often represent the best value housing for its occupants, being located in very prime areas and greatly enhancing the economic opportunities for its residents.

Slum clearance is a left-wing idea that has ruined and will continue to ruin many lives and careers. Slums are great moral forces too, as it enables community formation and monitoring of behavior by peers and relatives. They don’t lend themselves as easily to crimes as large-scale government built apartment buildings where poor people lead lives insulated from community and resort to drugs, sex and other vices.

8 Moo cow May 4, 2017 at 10:09 am

Slum clearing is left wing? I always thought it was because developers coveted the land beneath the slums for exactly the reason you identify – location.

Rio slums were cleared because they looked bad to Olympic visitors. Maybe this is leftist, I don’t know.

9 Thiago Ribeiro May 4, 2017 at 10:26 am

“Rio slums were cleared because they looked bad to Olympic visitors.”
Also because slums housing is mostly substandard. Traditionally, in Brazil, the Right wants to clear the slums (not always providing housing to the evicted people), the classic example is the administration of the far–right governor of the former state of Guanabara in the 1960s Carlos Lacerda. Although the Left has long seen the slum dwellers as a constituency and not favored slums clearimg, lately (paeticularly in Rousseff’s administration) it took over and wildly expanded the public housing programs that were more associated to the Right (former governor and mayor Paulo Maluf’s Cingapura Project and former Interior minister Mário Andreazza’s, mainly). At this point, Brazil surely has the most important public housing project in the world. Homelessness is project to vanish in a few years. Meanwhile, particularly in São Paulo, which is most of time ruled by the Right, slums placed at particularly coveted places tend to burn without the police ever identifying the culprits.

10 The Other Jim May 4, 2017 at 10:57 am

Uruguay doesn’t have these problems.

11 Thiago Ribeiro May 4, 2017 at 11:30 am

There ia no Uruguay, it is the rebel Cisplatine Province of the former Brazilian Empire and it is a legitimate part of Brazil. It must be remembered that the so-called Uruguayans stole Brazil’s wealthiest and most fertile province. Soon or late, this boa will disgorge the elephant.

As for non-existent slums in the non-existent Uruguay: https://www.google.com.br/search?q=uruguay+slums&oq=uruguay+slums&aqs=chrome..69i57.3017j0j4&client=tablet-android-samsung&sourceid=chrome-mobile&ie=UTF-8

12 dan1111 May 4, 2017 at 10:28 am

Some slum clearing has been advocated by the left with the goal of improving living conditions for the poor.

13 Troll Me May 4, 2017 at 11:16 am

Slums are usually cleared when some business pays off a politician to do so so the land can be used for some other purpose. It is not a left-wing idea. More often on the left, you find people concerned about being forced to move, and the injustices involved in lack of choice about the matter. (But so long as its going to happen, you might find some of them will get involved to ensure the process doesn’t go to bad, and so maybe you’re falsely associating them for the fact of being the more public face about what’s going on.)

We’re talking about India, and not gentrification of some low income relatively central neighbourhood with high income growth in nearby areas, right?

14 Dmitri Helios May 4, 2017 at 12:38 pm

“poor people lead lives insulated from community and resort to drugs, sex and other vices.”

Sex is a vice now? Your description of public housing seems like that of housing in an American inner city, not India.

15 Bob May 4, 2017 at 11:29 am

It’s not just india, and not just residential rents: In 2015 there was a big hooplah in Spain because rules for commercial rentals were lifted, which transformed many well used streets that were littered with business that would never, ever, be able to afford to be where they were without rent controls. There were plenty of examples of stores that had been open for a century, and paid century-old rent.

http://www.lavanguardia.com/local/barcelona/20150102/54422287527/barcelona-liquida-parte-tradicion-comercial.html

That said, things can go nuts in the other direction: I know someone that had to declare bankruptcy in Texas because their job was relocated to another state when they had 10 months left on a lease, and they were not able to find someone to sublet the apartment to.

16 mulp May 4, 2017 at 1:21 pm

Slum clearance and public housing in the US post WWII was like public housing post WWI, only for white people, until Congress was pressured to build public housing for blacks. However, white people had been indoctrinated by anti-bolshvic propaganda that only a single family dwelling on an individual plot of land was American, so the white only public housing stood vacant while the non-white housing had waiting list and we’re filled to capacity. So, non-whites were allowed to rent in the white only housing, making all public housing majority black.

To promote single family houses on plots of land required building transportation from the jobs to the housing, thus lots of trolleys were built to housing tracts that were white only. The trolleys were subsidized by the developers until they sold all their real estate and poor service drove people to cars by necessity. Thus housing in cities was for blacks and white trash poor.

Note Trump was a developer who believed housing should be segregated with white only multifamily separate from non-white and white trash housing.

He fought the Federal government for years to block black and poor parents from trying to improve their living conditions by moving to lower crime and better school district white housing.

17 Ritwik Priya May 4, 2017 at 1:52 pm

What about the elephant in the room – the fact that a lot of the vacant housing stock is likely because it is funded by tax-evaded money and is a play for eventual capital gains, so there’s no real opportunity cost of not renting (esp. when rental yields can be as low as ~2%). Also why sticker prices have tended to not move in India despite extended weak periods.

18 B Cole May 4, 2017 at 9:10 pm

Rent control bad…property zoning not a topic of polite discussion…

19 Alex FG May 5, 2017 at 4:12 am

#5 and probably too illiberal for this site

Like News outlets blindly amplifying every terrorist threat thus creating new terrorists with each air time minute the terrorists get – Facebook too has a responsibility for each of the murders happening on “FB live”. Lest for creating the playground for the murders in the first place.

As if “becoming content” weren’t already an unnessary reason to die and almost always resulting in a new low for the way of getting murdered Social Media’s complicit role in engagement becomes Even more disgusting considering those 3000 added workers are considered a tiny collateral for continuing a Venture which is presumably unprofitable and unuseful and only there so that no competitor can take its position.

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