If the real estate sector is properly managed, it could drive not just finance but demand for a range of products and services, writes T N Ninan
India’s housing market follows a home-ownership model, especially in the rural areas where rental arrangements are rare. Even in urban areas, 70 per cent of homes are self-owned; the rental market accounts for barely a quarter of the urban market. Still, that is a substantial number, so it is just as well that the government has brought out a model rental law for state governments to adopt. It will take a few years for the states to enact their legislation and set up special courts. Still, the new model law could fundamentally change the rental business, and housing itself.
House-building was marginal to the economy three decades ago. In most towns and cities it was a state monopoly – with the inevitable results in terms of shoddy construction, late delivery and massive shortages. Once private developers got into the act, the new satellite towns around Delhi began coming up, but new suburbs were yet to be opened up in a meaningful way in places like Kolkata and Pune, while the Bengaluru and Hyderabad housing booms were distant dreams. Naturally, then, housing finance in 1991 was equal to barely 1 per cent of GDP.
As the mortgage business came into its own, this proportion rose quite sharply to over 7 per cent of GDP by about 2005, only to slip back, but is now about 10 per cent. With very low delinquency rates, it is one of the safest forms of lending. If the sector is properly managed, it could become the bedrock of the economy — driving not just finance but demand for a range of products and services.
But there is no shortage of irrationalities in the sector. Real estate costs are far too high because of artificially inflated land prices. So two-thirds of homes have just one or two rooms and yet cost many years’ salary for the house buyer. Inevitably, rental incomes are low in relation to housing cost — barely 2 per cent in most cases. Counter-productive rental laws that give excessive protection to the tenant don’t help. An estimated 10 million homes lie vacant today because landlords don’t want to take the risk of renting, for fear of not getting back their property. This is an unconscionable waste of assets. Compare this to Germany, where 60 per cent rent their homes, and don’t feel the need to lock up savings in real estate. The model rental law might help correct the balance by giving equal weight to the interests of both landlord and tenant.
The Modi government has done quite well by the sector. The Pradhan Mantri Awas Yojana scheme has helped build over 12 million rural homes. The new programme for providing housing clusters for rent to migrants and workers in the informal economy could transform the housing market for a vast swathe of people who now live in sub-standard conditions, even occupying beds in a shift system. And RERA (Real Estate Regulation and Development Act) has changed the rules for the construction business, giving much greater protection to apartment buyers. The model rental law now adds to the list.
Bear in mind that the 2011 Census declared barely half of 230 million housing units to be in “good” condition. There is opportunity here, waiting to be tapped. It won’t be, if the land rackets that flourish because of the developer-politician nexus aren’t tackled. Delhi still has the vast majority of its vacant land sitting with the Delhi Development Authority, not available for development. Mumbai’s slum rehabilitation scheme has not worked as well as it might have. Housing density rules are a mess. Everywhere, the small pockets of land that are released into the housing market create artificial scarcities that the sharp-eyed know how to exploit (Robert Vadra providing a good example).
Change is slow and complicated because it involves governments at all three levels — municipal, state and national. Each has to do its bit, whereas much of the heavy lifting in recent years has been by the Centre. Real change will come when things happen at state and municipal levels. There is much ground to be covered if housing is to become truly affordable, and a viable investment.