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Business News/ Opinion / Wealth inequality and housing reforms
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Wealth inequality and housing reforms

Ensuring houses reflect their true prices will do more for reducing wealth inequality than providing housing for all

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Photo: Mint

The wealth of Indian households totalled nearly 350 trillion in 2012. The richest 10% of urban households alone held nearly one-third of it. This share will be even higher if we account for wealth in the form of gold, jewellery and durable goods, which are not considered in these estimates. The top 10% of urban households had nearly 50 times more wealth than bottom 40% of urban households put together, and were staggering 50,000 times wealthier than bottom 10% of urban households. These estimates are based on the National Sample Survey Office (NSSO) survey titled Key Indicators of Debt and Investment in India, released recently.

Such seemingly scary statistics is often used to blame capitalism and economic liberalization for rising inequality. No doubt that there is significant wealth inequality in urban India (more so, than in rural India as per the same survey), but the answer to lower wealth inequality lies elsewhere—radically reforming our housing market by reducing policy distortions, among others, and letting the prices to be determined on the market principle of demand and supply. The housing prices, which are not determined on the free market principle, have massively contributed to wealth inequality in India as well as elsewhere.

How do I arrive at this conclusion?

The wealth of Indian households, as is the case in many other countries, is predominantly in the form of land and homes, which account for 92% of wealth in urban areas—roughly equally held in land and houses. The wealth in the form of financial assets contributes merely 4.5%. While calculating wealth, shares and debentures held by households were valued at the market prices in the NSSO survey, but land and buildings were valued at the guideline prices. Had the latter also recorded on the basis of its market value, the share of land and buildings in urban household wealth will increase even further.

So the reported wealth inequality is really mostly about housing (land and homes) inequality. The gap between the rich, the middle class and the poor is about housing super-haves, housing haves and housing have-nots, respectively. Not only the poor, but also lower-middle income families are rationed out of the housing market when house prices are artificially high—these are housing have-nots. A middle-class household (housing haves) typically owns a smaller home in locations where house prices are lower than where the wealthy (housing super-haves, who tend to have multiple real estates) live.

In urban India, among the major states home ownership is the highest in Kerala at 82%, followed by Punjab at 77%, with an average value of a housing asset at 7- 9 lakh, respectively, in 2012 (at guideline prices). With high home ownership rates and the relatively modest house values, wealth inequality in these states will be one of the least in India. In contrast, the average value of a housing asset was higher in urban Maharashtra at 35 lakh with nearly 68% home ownership, lower than that in Kerala and Punjab. So inequality in urban Maharashtra is likely to be greater.

But does all this mean that we need to aim for 100% home ownership as a government policy? Not really.

We need not explicitly favour home ownership over the option of home renting. Rather we need to have a game plan to bring down the real estate prices near to their fundamental value. We need to restructure and reform the residential real estate market, so that home prices as well as rentals reflect the market reality of demand and supply, and are not driven by the nexus between builders and politicians with black money playing a key role.

The urban housing market currently suffers from oversupply of relatively upper-end houses, low demand and consequently high inventory, but nonetheless the real estate prices have hardly fallen. More affordable homes make it easier for first-time buyers to purchase a house and begin to build wealth. In contrast, in a country such as India the super wealthy who hold multiple real estate will lose the most when the house prices adjust to their fundamental value. In turn, the measured wealth inequality declines. We then wouldn’t have to worry about sub-optimal proposals such as taxing the super-rich more or introducing an inheritance tax to lower wealth inequality.

For the middle-income households living in a single owner-occupied home, the loss in home value is really only a notional one. For the very poor of course, the primary focus of the government policy should be to provide skills and jobs to raise their household income to a threshold where they can begin to think about a buying a home.

Housing market reforms are easier said than done. Revolutionizing the housing market to reflect the fundamental prices however, will do more for lowering wealth inequality than aiming directly for a goal of housing for all. The latter can result in low-quality government subsidized housing for poor simply to achieve the objective, without structurally reforming the housing sector itself.

Vidya Mahambare is associate professor of economics at Great Lakes Institute of Management, Chennai.

Comments are welcome at theirview@livemint.com

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Published: 09 Feb 2015, 03:56 PM IST
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