Tuesday, September 29, 2015

A housing market for the super-rich?

A few weeks back I had blogged about how property prices in Mumbai had exploded over the last decade, pricing all but a handful of those at the very highest level of the income ladder out of the market. As Michael Skapinker writes, this is true of London too,
Tiny apartments for £750,000. Family homes in the millions. This is in areas that, in recent memory, were poor and rundown. You can venture into neighbourhoods that still are, but you won’t do much better. The average London home cost £493,000 in February, according to the Office for National Statistics. And renting is no easier, taking a large chunk out of all but the highest salaries. Average London rents grew by 3.2 per cent in 2014-15, compared with 1.5 per cent in the rest of England... Many middle-class professionals are struggling to live in London: teachers, university lecturers, doctors, journalists. Look at the job ads. A senior house doctor in the urology department at University College Hospital: annual salary £30,002 to £47,175, plus a small London supplement. Assistant professor in international political economy at the London School of Economics: £51,908.

It was not always this way. Twenty-four years ago, when we bought a house in one of London’s loveliest neighbourhoods, our neighbours were, and still are, people who do the jobs described in these ads. None of us could afford to move into the area now.It is difficult to see how the successful candidates will find somewhere to live in a city where house prices are many multiples of their salaries... London boasts some of the world’s leading research hospitals and scientific institutes. Who will staff them? And if well-qualified professionals cannot afford to live in London, what of all those essential workers on even lower salaries: nurses, ambulance drivers, firefighters?

So, we live in an age where housing is unaffordable not only to the foot-soldiers of urban growth (janitors, small-service providers, small traders, lower-level public officials, and informal sector workers), but also to the knowledge workers and higher-level service professionals (senior public officials, academicians and researchers, professionals, and managers). In all these cases, a house of a standard that their parents (or the earlier generation) with similar relative incomes would afford, is simply out of reach, even if they use all their life-savings for the house. 

In the bigger cities on average, a Rs 10 million house (itself, a fast increasing lower limit), with a 30% upfront payment, would require an EMI of nearly Rs 75000, on a 25 year loan at an average of 12% interest rate. Assuming a third of income goes for housing, only families with annual income of around Rs 2.5 million can afford this. On the demand-side, in 2011-12, just 1.3% of all tax payers, or 3.9 lakh people in a country of 1.1 billion, had income above Rs 2 million! Multiply the number four fold, 1.6 million, and you realize that the affordability gap is staggering by several orders of magnitude. 

At the risk of repetition, it is abundantly clear that all urban housing, but for a marginal proportion at the top of the income ladder, has become unaffordable. Given the acute scarcity of vacant land within the city, the only answer to the problem is to go up vertically. Policies that promote addition of stock - higher FAR and lower property taxes (for vertical units), especially along transit corridors, coupled with release of large land banks locked up with various public entities - should take the center-stage of government's urban housing policy. This should complement the traditional affordable housing policies for the poor, like public housing programs, infrastructure grants, and mortgage interest subsidies. 

In fact, public policy should be tailored towards increasing the stock of housing, of any kind, without being unduly concerned with the details of means-testing and other regulation. For sure, this would result in some diversion to "ineligible" beneficiaries. But the demand is too huge at every level (except at the top-most tier), affordability heavily skewed, and the supply too limited for us to be micro-managing the housing market through unenforceable regulation. 

Further, as cities like London, Paris, and New York are finding out, it is also necessary to ensure that housing units and trophy properties do not become pure and highly remunerative investment avenues, which end up squeezing the housing supply itself. Underlining this, it is estimated that 28% of the wealth held by ultra-high net-worth Asian individuals (wealth above $30 mn) was in real estate, to 8% by Europeans and 6% by Americans. A telescopic property taxation system, with very high property tax rates for larger houses, and prohibitive enough vacant land tax on large land parcels, may be necessary to deter such rent-seeking. 

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