Tuesday, August 7, 2012

India's land shortage myth - HOW India keeps 78 million people homeless

“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.

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