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Saturday, February 9, 2008

Reforming India's rent-control law

In developing nations like India and Philippines, due to high population growth rates and low per capita incomes, the relative demand for ownership housing is low. Rental housing is thus an important part of the lives of many people.

A 1986 U.N. study estimated that about 4 percent of the worlds urban dwellers were renters. Preliminary research also suggested that as high as thirty percent of these 150 million people lived under rent control regimes. Almost 60 countries all over the world have rent control laws in place.

Rent controls were introduced in the early 1900s in the United States and some other parts of the world to check the uninhibited surge in demand for rental hosing following World War II, which combined with an explosion of migration to the urban centers. Several stages of deregulation have happened since, and the second generation of soft rent controls is now is place across much of the developed world.

The common thread running through most rent control legislation is the twin purposes of:
Protecting the tenant from eviction from the house he is living in, eaxcept for defined reasons under defined conditions, and

To protect him from having to pay more than a standard rent.

Most acts confer a very limited right upon the landlord to evict a tenant who is guilty of certain specified acts, or in certain circumstances. The most common grounds on which an eviction may be based are:
Breach of condition of tenancy,
Default in payment of rent for a specified period,
Requirement of building for own occupation, and
Material deterioration in the condition of the building

Most legislation strikes an appropriate balance to control and regulate eviction of tenants and not stop it altogether. At the same time, most economists will agree that rent controls are bad. However, nothing of note has bee done towards deregulating rents in India. A few economic and social arguments against rent control may be examined now.

Standard rent/fair rent is worked out as a percentage of the construction cost when built, according to an applicable Rent Control Act. This acts a tremendous disincentive for those wanting to invest in rental housing, because of the low rate of return as compared to other assets. The rate of increase of the market rents is far higher than the rate at which fair rent increases under the statute.

Such a low rate of return on investment is also detrimental to the long-term interests of tenants. Since landlords do not have an incentive to invest in existing housing stock, apartments will deteriorate.

The difficulties that a landlord may face in evicting a tenant also induces landlords to withdraw their buildings from the rental markets, fearing perpetual loss of control over their property.

Rent control also breeds uncontrolled rental markets where the rent is even higher than what it would have been in the absence of control. Not only does the high demand in controlled markets spill over into the uncontrolled markets, the supply is also affected since property owners will fear the onset of regulation.

Rent control also affects the mobility of labour and households that take advantage of the subsidy. This problem is often explained using the Old Lady Effect. An old widow continues to live in a big house that had previously been occupied by her deceased relatives. Even though she would have been much more comfortable in a smaller apartment, the low rent she pays acts as a disincentive. This is the picture of inefficiency in housing allocation, and similar instances across the market will leave a lot of housing space underutilized.

However, even a simple overview of the major case studies of cities across the world will not prove anything conclusively. While there are instances of rent control being severely detrimental to the interests of both landlords and tenants, there are also instances of cities, which have faced no problems at all. Thus many of the arguments against rent control, though theoretically sound, lack empirical support.

In Cairo, research has demonstrated that high vacancy rates and high rates of new construction could be found in a market, which was very tightly controlled. Even in Philippines, a study done by the Philippine Institute of Development Studies on the effects of rent controls in Manila showed that the benefits of rent control are positive. There are other examples where rental housing has flourished under moderate to strict rent control regimes in Canada and Mexico as well. (Please see, Rent Control Laws in India by Satvik Dev, Available at SSRN:

Thus, the theoretical consensus on the harms of rent control has not translated into uniform and universal success of deregulation measures. At the same time, it has to be admitted that any form of price control is undesirable, and ideally, all rent control must be abolished. But several other factors constrain any decisive action in this regard.

There are other factors too like urban infrastructure, rural-urban migration, regulation of land use and size of land holdings, etc., which go a long way in determining the structure of rental housing markets anywhere in the world.

Thus, instead of vouching for complete deregulation of rents, India needs to reform its Rent Control laws first and bring them up to respectable standards. Subsequently, the country needs to take a fresh look on its stance on deregulation and take measures based on solid empirical research and evidence, rather than following blindly the path taken by a few countries where deregulation has worked.


Forget yourself for others, and others will never forget you.

1 comment:

pritham k said...

If house owners want to ape develpoed countries in the amount of rent, then should they not follow suit in the advance as well? nowhere else do we need to lock a year's rent as advance. elsewhere it is a month's advance that you forego if you do not replace with a tenant.
is there an average increase rate to be followed in increase of present rent?