Rent Controls and Affordable Housing in Mumbai

by on January 24, 2018 at 7:25 am in Economics, Law, Travel | Permalink

The slums are the only free market housing in Mumbai.

That’s me in the latest video from MRUniversity, an on-the-ground look at the consequences and political economy of rent controls and affordable housing in Mumbai, India. Rent controls have been in place for so long in Mumbai that buildings are literally collapsing. Moreover, the approval process is so slow that just about the only new housing being built is condos for the well-off while at the same time a large fraction of the housing stock lies vacant.

Reuben Abraham is very good on how government housing is captured by the rich and why any solution to the affordable housing problem must focus on increasing supply.

1 So Much For Subtlety January 24, 2018 at 7:38 am

The slums are the only free market housing in Mumbai.

Therefore the free market causes slums? I expect it will not be long before someone makes that claim.

However the reverse is more interesting – why are they still slums? Unfettered development is a good thing, so the slums should have become middle class housing by now. Or more likely everyone who can afford to obtain a rent-controlled house has done so as it is a prime example of welfare for the middle class.

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2 Anon January 24, 2018 at 8:41 am

No property rights, I think

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3 edgar January 24, 2018 at 10:56 am

Interestingly, the Indian people have found ways to work around the government by creating property interests in rental properties through a practice known as “pagdi.” https://www.portiqo.com/blog/pagdi-system-renting-properties-everything-wanted-know/

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4 Alistair January 25, 2018 at 6:22 am

Yes, no property rights. Indian land and property titles insecure and hard to acquire.

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5 rayward January 24, 2018 at 8:13 am

There are many journal articles encouraging Mumbai to replace its first generation rent control with second generation rent control, the latter a more fine-tuned version of rent control that supposedly reduces the disincentive for landlords to maintain their properties. Whatever generation rent control, the better inquiry is why did Mumbai (or any other place) see the need for rent control. It’s not as though the downside of rent control is a secret: rent control is a disincentive to both development of more housing and to maintenance of existing housing. The obvious answer is that rent control was adopted because rents were too high (to borrow from the title to Matt Yglesias’s book about housing in DC). Why were rents too high? The obvious answer is that the demand for housing was high relative to the supply of housing. Then why didn’t enterprising developers build more housing? The obvious answer is that the cost to construct more housing wasn’t matched by the rent that could be paid by potential renters. Why couldn’t potential renters afford to pay the rent necessary for developers to construct more housing? The obvious answer is that the income of the potential renters was too low relative to the rent. Tabarrok believes the housing problem in Mumbai can be fixed simply by eliminating rent control. That’s the theoretical answer to the problem but not likely the practical answer. I suspect that the housing problem in Mumbai (and in many places) is the result of a mismatch between where people work (the city core) and where they can afford to live (the suburbs), the cost of land in the suburbs being much lower than in the urban core. So why don’t developers construct more housing in the places where it’s cheaper to construct? The obvious answer is that you can’t get there from here: in India, transit is either non-existent or grossly inadequate. The obvious solution to the dilemma is to build more and better transit, a solution that Tabarrok would likely oppose. That leaves rent control, perhaps second generation rent control, as the answer, an answer I don’t accept because it doesn’t solve the underlying problem.

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6 Mahendra January 24, 2018 at 7:57 pm

Sir
Tdys quality of construction is totally bogus and people in Maharashtra are unaware of it market has to collapse by 50 to 60 % in just three to four years time .Due to stringent rules on income tax very difficult to sell.further lack of amenities like water / power and drainage basically infrastructure has collapsed in mumbai

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7 Alistair January 25, 2018 at 6:27 am

I suspect that land ownership and development rights (supply side restrictions) initially created the vicious circle. You can’t easily acquire land and build in the core, and as you say, commuting is terrible, so there’s much less demand outside the core.

We have this in the UK at the moment; crazy supply side restrictions drive prices through the roof, so that people then think rent control is the answer….jeez….

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8 Charbes A. January 24, 2018 at 8:22 am

Let us be blunt. We are talking about a savage regime, where Satan has a free hand to oppress and crush the people. Nothing but regime change wll solve the problem.

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9 Borjigid January 24, 2018 at 10:42 am

Chill bro.

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10 Charbes A. January 24, 2018 at 10:49 am

It is time to free India from oppression.

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11 Agammamon January 24, 2018 at 11:28 am

Yeah, because every other place we’ve ‘freed from oppression’ has so little oppression in it nowadays.

I’m pretty sure the Indians wouldn’t be happier with both oppression and half their country bombed flat and foreign soldiers patrolling the streets.

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12 Charbes A. January 24, 2018 at 12:27 pm

Indians live under an intolerable dictatorship that deny them freedom of speech, freedom to worship and freedom of enterprise. They would salute America as their liberator.

13 msgkings January 24, 2018 at 11:48 am

First we must free Brazil from the yoke of their savage oppressors, the Paraguayans.

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14 Charbes A. January 24, 2018 at 12:25 pm

There is not an inch of Brazilian territory under Paraguayan control. The border between those countries is very famous and internationally recognized. https://en.m.wikipedia.org/wiki/Triple_Frontier

15 msgkings January 24, 2018 at 12:36 pm

True, that border is very famous, people are always talking about it. My mistake, Brazil must be freed from the yoke of their savage oppressors, the Uruguayans.

16 Charbes A. January 24, 2018 at 1:59 pm

It is not true. Uruguay was a Brazilian Province. It is widely known. https://en.m.wikipedia.org/wiki/Cisplatina Both countries were allies against Paraguayan tyrant López.

17 msgkings January 24, 2018 at 3:44 pm

Of course it is true, just like the Great Southern War of 1891, when Benjamin Harrison led a battalion of troops into Rio and dragged da Fonseca’s body through the streets. As an American, you remember studying this don’t you?

18 Charbes A. January 24, 2018 at 4:07 pm

It never happened. Brazil and the United States are allies. We fought together against Nazism and against the Dominican aggressors.

19 msgkings January 24, 2018 at 4:46 pm

Well we might be now, but obviously not in 1891

20 athEIst January 24, 2018 at 7:54 pm

Thanks msgkings, I put a bee in Thago’s bonnet the other day about Brazil losing a war to Paraguay. He TOOK the bait!

21 Charbes A. January 24, 2018 at 7:59 pm

I really don’t know what you are talking about. I am a fellow American of yours.

22 B Cole January 24, 2018 at 8:36 am

Discussing rent control but not restrictive property zoning…ugh.

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23 Axa January 24, 2018 at 9:01 am

If renting real estate is not a business alternative, what do people do? what is the effect on land price? A market of only buy/sell, no rent?

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24 shrikanthk January 24, 2018 at 10:02 am

Another major cause of the high rents and house prices in Mumbai (and other Indian cities) is the regulation around FSI.

Indian buildings are not allowed to grow too tall thanks to the FSI rules. And this chokes up the supply, particularly in city downtowns, where there is paucity of space.

Anyone who has visited India would have noted the dwarfed nature of Indian buildings. There are not more than 2-3 buildings in all of India (I repeat – ALL of India) that are more than 50% of the height of the World Trade Center tower in New York city

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25 Alex Tabarrok January 24, 2018 at 10:33 am

FSI is the next video!

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26 Kris January 24, 2018 at 3:01 pm

Shrikanth: Tall buildings are not a panacea, and can cause more strife. The taller a building gets, more indispensable do the elevators get. And as your doubtless know, electricity is highly unreliable in Indian cities.

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27 shrikanthk January 24, 2018 at 3:20 pm

Electricity is a separate problem. But in my view that shouldn’t keep us from making taller buildings.

I am not calling for NYC style skyline in every city. The reality today is pathetic. There are probably a hundred buildings in NYC alone that are taller than any building in all of India.

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28 edgar January 24, 2018 at 11:08 am

WIsh I could remember where I saw it, but somebody smart recently made the case that the rich capturing the new housing being built is not necessarily totally a bad thing. The argument ran along the line that increasing the housing supply can be a good thing even if it is only at the high end of the market because some rich people will move out of their current lodging thereby opening up a chain reaction with people in different segments of the market able to trade up. In general it seems like arguments that hinge upon the asssumption that things that are good for the rich are necessarily bad for the poor need to be examined more closely.

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29 Viking January 24, 2018 at 11:21 am

Sumner.

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30 edgar January 24, 2018 at 11:41 am

Many thanks.

“Many left-wingers start with the false assumption that society needs to build more “affordable housing”. In fact, in any well functioning society the vast majority of the new housing being built would be “unaffordable”, that is, out of the price range of the median income.

To see why, consider the nature of economic progress. During the Middle Ages, most people lived in miserable hovels. Today, most people in America live in nice houses and apartments. This transition occurred because the new homes being built tended to be superior to the existing stock of homes, at any given point in time.”

Link: http://econlog.econlib.org/archives/2018/01/we_should_focus.html

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31 Jim January 24, 2018 at 11:48 am

Correct. That is the point that Abraham makes in the video.

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32 athEIst January 24, 2018 at 8:03 pm

Mumbai didn’t have these problems when it was called Bombay,

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33 David January 25, 2018 at 4:26 am

Question (sort of newbie question): In the video it says lengthy approval, and cost of capital is dictating building rich-people housing instead of middle-class housing. Why is this so?

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34 Glenn January 26, 2018 at 11:58 am

It would have been interesting if the author had interviewed a government official. Would that person have acknowledged that the root of the problem was government policies? Doubtful. Like here in the USA, politicians in India probably blame the free market for every ill.

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