Dismantling the permit raj in housing

India’s cities faced a shortage of nearly 19 million homes in 2012, 95% of which were in the economically weaker section and low income group segment. In fact, the government’s slum census of 2011 found that one in six urban residents was living in conditions that were “unfit for human habitation”. Mumbai has some of the highest price-to-income ratios in the world, as a result of which the average living space in Mumbai was just 48 sq. ft per person as of 2009. For context, the US government mandates a minimum of 50 sq. ft per prisoner for prison cells. While the precise numbers can be debated, there is no doubt that the extent of shortage in urban India is high.

The Narendra Modi government recognized the severity of the housing problem and launched the ambitious “Housing for All” scheme to provide universal housing by 2022. However, the scale of the problem, both in terms of meeting the backlog and providing for the future, is too large to be solved through government subsidies and top-down construction programmes alone. For example, the Rajiv Rinn Yojana, which was targeted to reach one million low-income and economically weaker households, only reached 229 beneficiaries.

The government’s efforts to meet the housing needs of the poor before enabling well-functioning land and housing markets have yielded mixed results, at best. There simply isn’t enough housing stock to meet the demand of the rest of the population. Relatively well-off groups and insiders often end up capturing new stock created by the government directly or indirectly. Mumbai’s Adarsh Housing Society scam was just one (high-profile) example of an otherwise pervasive problem. Supply-constrained markets make misappropriation lucrative.

Stringent land-use regulations have been a major source of market distortions in Indian cities, which have some of the most restrictive floor space index (FSI) ceilings in the world. The index determines the amount of built-up space a developer can erect on a plot of land—the higher the number, the more the developer can build. For instance, the central business district of Mumbai allows a maximum of 1.33 sq. ft of floor area per unit of land area to be built, compared to New York City (17.0) and Tokyo (20.0). Similarly, no residential building in Delhi can be taller than 15m, effectively less than five floors. These measures artificially limit supply, raising house prices and at the same time contributing to smaller space available per person, widespread sprawl, and pollution as a result of longer commutes.

Steps taken by the government to charge developers for additional floor space—mostly by allowing an increase on payment of a premium or for providing some public utility (such as public parking)—have ultimately passed on the additional costs to home-buyers in the form of higher prices. At the same time, they have opened up new channels for corruption where a middle market develops between builders and officials to obtain permissions for more FSI for individual projects. The municipal corporation of Greater Mumbai sells additional FSI in some areas at a high premium to developers; the revenue from these sales now exceeds the entire property tax collected by the municipality (see “Raising Revenues From Land-based Financing”, Mint, 20 December). This revenue actually comes at the cost of limiting access to housing.

Even after land and floor area permissions are obtained for residential projects, new construction cannot begin without a prohibitively large number of government approvals. From a forthcoming IDFC Institute report on affordable housing, we found residential housing projects that required more than 150 approvals from different agencies at the city, state and national levels. Since each approval can block an entire project or delay completion, the process creates holdout problems where individual agencies can sit on files before large payouts are made. The official and unofficial payments required for these approvals, time taken, and uncertainty add to the risk-adjusted cost of capital and overall project costs.

There are additional costs for buyers at the transacting phase due to some of the highest stamp duty and registration fees in the world for property purchases. For instance, stamp duty in the urban areas of Punjab is 9% and for municipal corporation areas in Maharashtra, it is 5%. Contrast this with Beijing (China), where these rates are 0.05%, Florida in the US (0.7%), or New Zealand, where they have been abolished entirely. These charges discourage buyers from declaring the true value of the property when reporting the transaction, contributing to the “black money” problem and obfuscating information of property values, which creates information asymmetries for everyone else.

Most housing policies in India have got the sequencing wrong by trying to tackle symptoms—such as by providing small-scale subsidies for home loans—rather than the root causes. A dramatic change in approach is needed to first ease the supply-side constraints that will allow the market to provide a lot more housing stock. Government should address the legacy of distortionary policies that affect the entire market, before launching new schemes that are both more ambitious and harder to execute. Putting the demand-side cart before the supply-side horse is not likely to get us any closer to the cherished dream of universal housing.

Reuben Abraham, Kshitij Batra and Sahil Gandhi are, respectively, CEO and junior fellow at the IDFC Institute, and assistant professor at the School of Habitat Studies, TISS, Mumbai.

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