“The idea that land is fixed in amount is really based on an
error which one encounters in economic discussions with wearisome frequency,”
wrote American economist John Bates Clark in his 1899 book, The Distribution of Income. Although the
supply of land on Earth is indeed fixed, supply of usable floor-space is
virtually limitless with modern high-rises, elevators and construction
technology.
Yet, in spite of this limitless supply that has been humanly attainable for more than a century, India managed to keep about 80 million people homeless. Here is how it is done:
1. Floor Space Index: In 2010, commercial rent in downtown Mumbai was higher than commercial rent in
midtown Manhattan. Apparently, commercial property was almost impossible to
come by in Mumbai.
Demand was ahead of
Supply they said. The Times of India called India the main
driver of growth in Asia’s property market. Apparently, everyone took the
prices as a sign of wealth and progress, ignoring the significantly higher
salaries and better indicators of human development in New York, Hong Kong or
Singapore. I, however, saw this as Supply being choked off by misguided
policies, which resulted in prices that were artificially high.
The most effective of these choking instruments was India’s
FSI policy. FSI, or Floor Space Index, is the ratio
between the build-up area allowed and the plot area available. So, if the FSI
is 1, then a 100sq m plot can only have 100sq m of buildup area. With setbacks
and common spaces, builders usually managed to squeeze out a few extra
floors. Most Indian cities have FSIs
fixed in between 0.4 to 1.0. In Mumbai, FSI was fixed at 1.33 for decades.
Worldwide, in cities where the topography constrains land supply, planners
compensate by increasing the height of buildings. Thus they are able to provide
their citizens with more living and working areas. That is why island cities
like Hong Kong, New York, and Singapore, and to a certain extent Chicago have
tall skyscrapers while London, Paris, LA, generally do not. Most of these cities
have FSI in the 10+ range – New York City’s average FSI is about 12 –with
incremental increases every few years to accommodate growth.
Mumbai had the dubious distinction of being the only major
city in the world to do the complete opposite; start with a low FSI and then
lower it even further. Mumbai had steadily
decreased
its FSI; In 1964 it was 4.5 in Nariman Point while in 2006 it was between 1.00
and 1.33 over most of the island. Hence, any redevelopment would result in a
loss of floor space, which immediately scuttled any thought of such changes.
This explained the mystery why thriving businesses operated out of Mumbai’s
many drab old buildings.
This policy also explained the exorbitant rents. Rent wasn’t high because demand was
ahead of supply, as everyone thought. It was in fact the complete opposite.
Demand was healthy and normal, and supply was artificially suppressed. Reduce
supply in the face of increased demand and just watch the equilibrium price
rise. It was in any basic economics textbook.
This arcane FSI law is the reason why most Indian city
centers have nothing taller than 5-story buildings. The few high-rises that
were coming up were because of a newly introduced market in Tradable
Development Rights (TDRs), where developers could buy and sell unused FSI (over
single-story shanty towns for example). Not only was that nothing but a
legalized racket in controlling extra FSI, it suddenly gave enormous power to
slumlords, who could then trade that unused airspace over the heads of all the
slum dwellers for cash. Even with this loophole, Mumbai's FSI was capped at 4.0., with
tragic consequences in a city of more than 17 million people.
Strangely, most of educated India seemed to subscribe to the
misguided myth that high-rises would result in increased congestion on the
streets. On the contrary, high-rises increase the space available per human
and, when combined with efficient transit engineering and planning, result in
decreased vehicle density. High rises in the Central Business District (CBD) of
any city enable city planners to create hub-and-spoke systems for efficient
mass transit to-from outlying suburbia. As India boomed in the last decade, the
opposite had occurred; CBDs were stuck with old low-rises while suburbs (with
lax FSI rules) ended up with commercial and residential high-rises.
A simple increase in FSI would create more living space. It
would also result in the redevelopment of obsolete buildings into safer, more
efficient structures. None of this is revolutionary; all of the above have been
achieved in Hong Kong, Singapore, and Tokyo with far higher population
densities than Mumbai. It would simply provide Mumbai’s millions a decent place
to live, work and play.
2. The Rent Control Act of 1942: India’s Tenant Act of 1942 made it illegal to evict any
tenant. This WWII era pro-tenant act made it virtually impossible
for a landlord to legally evict any tenant. In addition, it made illegal for a
landlord to raise rent, irrespective of any details in the actual tenancy
contract.
Hence, in 2012, millions of middle class tenants – often educated and
employed in white collar sectors – were legally squatting on prime real estate
in urban India while paying miniscule rents from four decades ago. Ironically,
the tenancy act was clear on the landlord’s ownership of the building, making
it illegal for the tenant to make any physical changes to it. Since it wasn’t
cost-effective for the landlord to make any improvements, and the tenants
weren’t allowed to, countless buildings in downtown areas were lying in squalid
disrepair. It wasn’t poverty that was making Mumbai look the way it did, but
policies enacted by its leaders. But no one seemed to notice, as the Indian
economy was supposed to be booming, and money was supposed to magically fix all
these problems. Shiny new malls were
supposed to be like some grand benevolent bacteria that would slowly spread its
clean, new efficiency across India’s urban chaos.
Although some loopholes did exist in the system – such as
11-month leases – the Tenant Act created a very real fear of tenant squatters
that ensured that a majority of surplus property, bought as investments, was
being kept out of the rental market. Compare that to major cities like Hong
Kong, New York, or London where many respectable professionals are also
landlords, making a profitable business from renting out their extra properties
to tenants. These mutually beneficial free-market relationships are the
foundation of any urban housing policy; providing a steady supply of housing at
multiple price points to diverse sections of society – young students, starter
households, transitional workers – who do not want to buy housing. The problem
was exacerbated by the fact that Indian courts were backlogged for 10-15 years,
with 24 million cases pending nationwide as of 2007.
Thus, India’s rent control policies continued to keep old
rents unrealistically low, legalized squatting on private property, and pushed
new rents stratospherically high. I visited a building where the asking rent
for an apartment was US$ 2500 a month, while tenants in the identical apartment
below were paying US$ 2.50 a month. Apparently someone’s grandfather had signed
a lease a few decades ago. Equilibrium prices separated by a multiple of 1000?
A simple Supply and Demand graph would show that the market equilibrium price
should be US$1250 a month – closer to what I willing to pay.
‘Tenant-squatters’ in urban India were almost always middle
class, educated and gainfully employed, squatting on constructed property with
clear titles. In other words, the law of the land was enabling squatting by the
very socio-economic class that needed it the least.
Ironically, poor slum dwellers couldn’t become
tenant-squatters for two reasons; no building landlord would sign a lease with
them and with slums beyond the reach of justice, no slumlord would let them
become squatters within the slums without something in return.
Scrapping this rent-control policy would bring all rents to
free-market equilibrium and free up old property for rebuilding. Yes, if rent
controls were repealed, rents would rise in the short-term. But, as a result,
the rental housing business would become immediately profitable. High prices
would not last in a free property market: Entrepreneurs would rush in with
increased investment for this higher rate of profit, resulting in an increased
supply of rental housing. Eventually, the profitability of rental housing would
be no more profitable than industry in general. Hence, the long-term effect of
the repeal of rent controls would be a desperately needed increase in the
supply of rental housing. Increased supply of rental housing – of all price
levels – is vital for those that cannot afford to buy housing and would
significantly decrease the endemic congestion and squalor of Indian cities.
Without a free property market, the benefits of India’s much
touted economic liberalization weren’t trickling down to the poorer masses.
These draconian policies had combined to create a zero sum game where poorer
households faced a constant reduction in their affordable living space since
they could never compete with the increased consumption of richer households in
a market with finite supply.
Ironically, since supply of legitimate property was choked
off and rent was high, extra demand from gainfully employed citizens spilled
over into illegitimate property – the slums. Inevitably, rent in these slums
wasn’t cheap. Again, India’s poorest were hurt the most by India’s property
laws.
Of the 60% of Mumbai’s population of 17 million that lived
in squalid slums, barely 25% were officially considered poor.
Simple arithmetic suggests that at least 35% could afford to pay for decent
housing if it were available at a reasonable price. With the gainfully employed
blue-collar workers forced to live in slums, the truly abject poor had nowhere
to go but the streets.
These were people like Subhash, one of the many young men trying
to sell stuff – bootleg DVDs, plastic cell-phone covers, pens, etc – at
Mumbai’s traffic intersections. He described himself simply as “a sixteen year
old from the North,” said, “I live under a flyover in Thane. I don’t want to
beg, but it is difficult to find work, as people ask me, where are you from?
With no home, they think I will steal and run away, and they cannot find me.
How can I get eat if I don’t work? I don’t want to beg, but it is really
difficult to sleep on an empty stomach.” Starker images are but a quick search
away on Flickr. The city of Mumbai alone has about 300,000 ‘pavement-dwellers’
like Subash, who don’t even have a slum to call home.
For these homeless (or rather shanty-less), estimated by the
2001 national census to amount to almost 8 million Indians, Government response
is equal to indifference; In Delhi 100,000 homeless people fight over access to
night shelters with a total capacity of 2,937.
3. The Urban Land Ceiling Act of 1976: "To provide for the imposition of a ceiling on vacant land in urban agglomerations, for the acquisition of such land in excess of the ceiling limit, to regulate the construction of buildings on such land and for matters connected therewith, with a view to preventing the concentration of urban land in the hands of a few persons and speculation and profiteering therein and with a view to bringing about an equitable distribution of land in urban agglomerations to subserve the common good."
This act essentially barred development on large tracts of urban land. Although the act had been repealed by a few states such as Gujarat and Maharashtra, land purchased under the provisions of this act continued to lie vacant by 2012.
4. The Coastal Regulations Zone Notification of 1991: This act had banned
all construction within 500 meters inland of the High Tide Line. This
effectively eliminated the possibility of building any new seafront structure.
The original intention might have resulted in beautifully restored colonial
buildings a la Singapore, but did not work in Mumbai in the absence of a free
property market.
Waterfront real estate is highly prized in cities like Hong
Kong, New York, Singapore, and Chicago. Yet in Mumbai, it remains drab and
undeveloped; out of the hands of developers whose projects would ease the
housing problem, and; beyond the budgets of architecture buffs that would
restore them to their former glory.
These two laws not only left the city with a seafront of dingy, old
4-storey structures, but it has also deprived housing opportunities to many.
Consequences: Most built-up property in India’s urban centers was either
held by tenant-squatters or locked up in tenant-landlord legal battles. There
was no churn, there was no healthy renewal. Availability of property, instead of
being based on free market forces, instead depends upon a combination of luck
and the agreements that one’s ancestors entered into decades ago.
All location decisions, commercial, residential, or any
other, were based upon the above irrational factors. With such policies
restricting free choice – with regards to being able to live where one works,
plays, studies, etc. – every Indian city had become a mass of humanity moving
from all directions to all directions at all points in time. The end result was
an urban dystopia where traffic and mass transit had attained a level of chaos
that was unseen and unprecedented anywhere on the planet. This uniquely Indian
phenomenon was often misconstrued by Indians to be a by-product of the immense
population, and by foreign journalists (like the
New York Times’ Nicholas Kristof) as “teeming India”. In reality,
most Indian cities – including Mumbai, Delhi and Calcutta – are less populous
than New York or Tokyo and have far fewer vehicles, yet appear to be far more
densely inhabited.
In other words, it’s always rush hour in urban India. Internationally, rush hour in any major
metropolis involves heavy traffic moving from the residential areas into the
commercial areas in the morning and returning in the evening. This makes it
easier to predict movement patterns and to plan and build effective roads and
mass transit systems. In India, with property laws skewing housing patterns,
and the resulting human traffic moving from every point towards every point, it
is impossible to predict human movement patterns and attempts at providing mass
transit become losing uphill battles.
Other unintended consequences were also undesirable. For example, I found out that, with old tenant-squatter
rents kept unrealistically low, landowners of older buildings have to resort to
other sources of income – such as massive billboards on their property. This
has led to the strangely Indian phenomenon of billboards advertising the latest
consumerist fantasy in sizes bigger than the old decrepit buildings that they
covered. Views were barred, air/light circulation blocked, safety norms
overlooked while landlords try to make their old properties viable.
Tenant-squatters lose out yet again. No, this wasn’t an early indicator of growing consumerism in a newly-capitalist economy. It was simply the last resort for hapless property owners trying to find an income stream not controlled by anachronistic property laws.
