Rent Control in Mumbai

Rent controls are popular with renters all over the world because they appear to offer lower prices with few adverse consequences. In the long run, however, extensive rent controls can cause entire cities to crumble. You can see that today in Mumbai, India.

All of the predicted consequences of rent control can be seen in Mumbai. There is a shortage of rental housing. Very, very little new rental housing is being constructed, and the stock of old rental housing is crumbling and falling apart. At rents of 500 to 600 rupees a month, maybe $10 a month, the landlords can't even afford to pay the taxes, let alone pay the maintenance and the upkeep.

Rent controls began in Mumbai in 1949 when rents were frozen at 1940 levels. And, amazingly, rents have barely increased since that time despite tremendous inflation and increased urbanization. To learn more, I spoke with Vaidehi Tandel, Reuben Abraham and Kshitij Batra from the IDFC Institute -- a think tank in Mumbai that works on issues of urban infrastructure.

[Alex] They froze rents at 1940 levels? [Kshitij] They did. We hear of these stories where families are paying a few hundred rupees a month for a flat that would otherwise cost maybe a lakh of rupees a month. [Alex] You're going to have to tell us what a lakh is.[Kshitij] I'm sorry. So that would be about 100,000 rupees. [Alex] Wow! So, they're paying 100 or 200, 300 rupees a month for something which is worth 100,000? [Kshitij] Yeah. In this case, you have actually a lot of families that are perfectly well-to-do. But they've just been grandfathered into these rent-controlled flats and they've been living there for that time. These are massive properties. Some of these are massive, massive apartments.

[Alex] In India, tenant rights are very, very strong, and the court system is very, very slow. The owner of this building -- which has long been under rent control -- has long tried to evict the tenants. In fact, the owner of this building has been involved in a lawsuit that was started by his grandfather 50 years ago. There's a remarkable sign from the owners. Take a look. "Portions of the said building are in ruinous condition, likely to fall, and dangerous to any person occupying or passing by the same." It's falling apart. It's beginning to crumble. Now, in part, that's a threat to try and get the tenants to leave. But it's an all-too-believable threat.

[News presenter] Another deadly building collapsed in India. A five-story apartment building fell in Mumbai early Friday morning while people were fast asleep. It's unknown exactly how many people are still underneath the rubble. Rescuers have been digging for survivors all day long.

[Vaidehi] There's really no incentives for them to maintain the existing stock and you see really bad deterioration of the buildings that are under rent controls. So, the government then had to go and create an assessed buildings policy which sort of looks after these buildings and pays for their maintenance. [Alex] Assess as a special tax? [Vaidehi] Yes, for repairing and maintaining these very, very dilapidated and at-risk rent control buildings. [Alex] So, does the government actually use the proceeds of the tax to fix the buildings? [Vaidehi] I'm not sure, actually.

[Alex] There's another problem with rent controls in Mumbai. Rent controls encourage landlords to leave their properties vacant rather than renting them out and risking the possibility of having a tenant that they can't evict for the next half-century. It's no surprise that 15% of the housing stock in Mumbai lies vacant.

[Kshitij] I think the census in 2011 --that's a government survey -- found that around 11 million properties were lying vacant across urban India, which is a huge number, given that they themselves estimated that the housing shortfall is 18 million.

[Alex] It's clear that abolishing rent controls would solve many of these problems. But are there other ways to get more affordable housing on the market? Can the government build more homes for the poor?

[Reuben] I've been working on this particular issue for at least nine years now, and I have moved from calling it "affordable housing" to calling it "making housing affordable." Any housing that comes into the market will be captured by the rich or whoever have the means to capture it. So, therefore, I would argue that the real focus now should be on just increasing the supply of housing. Because if you don't increase the supply of housing, the rich will just keep capturing it. So, you will see numerous instances just in Mumbai itself of you look at an urban plan, and you see these plans for affordable housing, where four 1-bedroom apartments have effectively become one 4-bedroom apartment. So, you've literally grabbed from the poor and made hot condos for the rich. Anytime you have two prices on the market, the low price will sell to the high price, or there will be some market operator that will find a way to grab the lower price because there's a higher price that's actually available on the market. In effect, the slums look like poverty, when in fact it's actually a real estate problem because the cost of housing is just exorbitant at the sort of income levels that you have in a city like Mumbai. [Alex] So, the slums are really the only free market housing. [Reuben] That's right, free-market housing and funnily enough, also the only form of rental housing that's available.

[Kshitij] Once you put in place a policy like that, you do not have an organized opposition to it. If you try to increase those rents, you'd have politically a backlash. So, people would say rent's already so high in Mumbai, why would you allow increase in rent controls? It's a policy that affects not just people who are living here but people who can't live here. [Alex] People who don't live here but who want to move here. [Kshitij] Right, right. [Alex] So, they don't have a political base from which to act. [Kshitij] Absolutely. That's absolutely right. [Alex] Wow.

[Alex] Rent controls are not the only problem. The approval process to build new housing in Mumbai is lengthy. In part, because builders are subject to numerous requirements, not just to do with safety issues but also on building heights, room sizes, and even parking requirements for apartments built for people who typically don't own cars.

[Reuben] The single biggest problem would be approvals. [Alex] The approval process -- it's longer here than in Europe or the United States? [Reuben] Far longer. Today, cost of capital in India is close to 15% if not more. At 15%, if my approvals process takes 24 months, don't be surprised that I will only be able to build condos. I will not be able to build anything cheaper than that because it's just pure mathematics. That's just how it works. As long as the cost of capital remains that high and the approvals process is this long, you will end up with condos. Companies that began with the explicit aim of building affordable housing -- raised a humungous amount of private equity planning to build 700,000 rupee homes -- are today building 5 million rupee homes because that's what the entire process of approvals does to them. That's the effective consequence of all these regulations which were really put in place in a well-meaning fashion, but have obviously -- you know the old line about the path to hell being paved with good intentions. This is a great example of that.