Housing Rental Market

Shelter for all is among the Millennium Development Goals (MDGs) enunciated by the United Nations. Urban Housing is one of the major challenges facing administrators and policy makers across the globe. It is also unfortunately one of the issues trapped in the gridlock of outdated policy prescriptions and bureaucracy.

The Union and State Governments in India have over the years taken up housing as a priority welfare activity and programs like the Indira Awas Yojana (IAY) and the Valmiki Ambedkar Away Yojana (VAMBAY) have gone a long way towards addressing housing problems in many states. The IAY and its other variants have dovetailed Government of India and State Government finances, with a small beneficiary share, to construct basic housing units. A few States like Andhra Pradesh have recently started leveraging institutional finance from Nationalised Banks and thereby expanded the coverage.

A time has now come to have a serious re-look at this model, especially with respect to urban areas. I have a few reasons as to why we need to move beyond this model and look at other options. Foremost, with increasing urbanization, the demand for housing in urban areas has far outstripped the supply and the deficit is widening sharply. Land is an extremely scarce commodity in our cities, and it is imperative that we make the most optimal use of this resource. Further, the urban poor have certain unique characteristics, which mark them out from the rural poor. Migration is one of the important characteristic traits among urban poor and it is necessary for any urban housing model to take this into account.

We need to construct our urban housing model by taking into account the specific context, the profile of the beneficiaries, their requirements, and then integrate this with our broader socio-economic goals vis-a-vis economic development in urban areas. We need to ask these questions before framing the answers.

In the present arrangement, it is commonplace to find people selling away their housing units, and moving again into squatter slums. In a VAMBAY settlement of 3372 houses in Vijayawada, it was observed that in 3 years about 850 have sold away their houses and about 500 have rented out their houses. Of those who purchased the houses, more than 60% have made substantial changes to the old, Government constructed houses, and some have reconstructed better houses and converted them partly into commercial units. This VAMBAY Colony is surely representative of Government sponsored Urban Housing Projects across the country. This can be partially controlled by building only multi-storied tenaments.

It is important that housing policies meet our broader economic objectives. Urban Housing should seek to cover those sections of the economy who are essential foot soldiers in the urban growth engine. Policy makers need to be sensitive to the need for regulated and controlled development of urban centers. Our rapidly growing cities, severely constrained by lack of basic civic infrastructure, should not be strained to its seams by massive influxes from rural areas. We need to leverage the economic growth in our cities to reducing poverty by expanding opportunities for the poorer people, but also be aware of the dangers posed to the sustenance of this growth. Ultimately our poverty elimination and other objectives will be achieved only if the City continues to remain vibrant and grow. If we do not wake up to this challenge, we could end up killing the proverbial goose that lays the golden eggs.

The primary objective should be to provide housing for a specific category of poor, who are vital contributors to urban growth. Otherwise, it will only serve as one of the many ill-directed incentives, which end up promoting indiscriminate urban migration. Instead of adopting a one-size-fits-all approach in equally subsidising all the urban poor, the Government may consider providing differential subsidies to various categories of urban poor, based on the larger development objectives. For example, semi-skilled or self-employed urban poor who are vital to driving urban growth, need to be incentivised, as opposed to unskilled and un-employable poor migrating from rural areas, whose services are more immportant and can be better utilised in a rural economy.

What is then the policy solution to Urban Housing? I believe that we can better address these concerns if instead of allotting houses, we create a market in rented government housing for the poor. Instead of transferring ownership to the inhabitant, a pool of such housing units can be constructed and made available in the market. A seniority list of beneficiaries can be prepared and they can be allotted rent vouchers. These vouchers can be allotted for a year at a time, and can then be renewed, thereby keeping a check on fraudulent practices like sales and sub-leases by the original allottees. As an incentive, the house can be finally transferred to the tenant after a certain period of responsible habitation, under certain conditions.

To those who will claim that the rents will be an additional burden on the poor, my answer is that they are already paying atleast Rs 500-1000 as monthly rents for squatter huts in slums, without access to any basic civic facilities. In contrast to this, in such housing colonies they would no longer have to suffer from problems associated with uncertainty in tenure, and will have access to all the basic civic facilities. In any case all Government Housing schemes today have a significant bank loan share, which the beneficiary has to repay through monthly instalments. Rental vouchers would only be substituting the payments to the bank with the private developer, while ensuring far better quality in construction and in maintenance.

In order to dovetail resources from other sources, we need to extensively encourage Public Private Partnership (PPP) in this sector. Given the booming construction market, huge demand for poor and lower income housing, and the plethora of long-tenor financing options available, these ventures offer tremendous potential for real estate developers. Fifteen to twenty year Build-Operate-Transfer (BOT) contracts can be an attractive business proposition for developers, who can collect pre-determined rents from the tenants. The rental subsidy offerred by the Government can be directly transferred to the private builder. This would ensure better targetting of the subsidies and its more efficient utilisation. Further, instead of the single size homogeneous housing units, the private builder can be given the freedom to construct units with small variations in plinth area and amenities.

While issuing the vouchers, the Government can give beneficiary the freedom to choose between the many available private and Government housing units. While the Government will only provide the basic minimum of subsidy, the beneficiary should be free at any time to move to a higher category of housing by paying the differential over the subsidy. All these will generate a healthy competition between private builders and ensure quality in construction and maintenance.

Rent vouchers will also help us utilise our scarce subsidy resources more effectively. Instead of spending the subsidy upfront for construction, it can now be drawn down over a longer time frame. This will help cover greater number of beneficiaries than would have been possible by constructing houses and directly transferring ownership. Thus, instead of covering 1 million beneficiaries over 15 years, we can now cover all of them over a couple of years.

The rental vouchers are an economically efficient system of targetting subsidies and meeting the welfare objectives. By encouraging competition among private builders, it ensures good quality of construction and more efficient utilisation of resources. It also reduces the market distortions like sale or lease of housing units and allotment to the less needy and denying those urgently and most badly in need of housing. By giving the beneficiaries the freedom to choose their housing locations and categories, rent vouchers will make urban housing program for the poor more demand driven. An efficient system should be able to self-select its target beneficiaries, while screening out the ineligible. In the absence of any better alternative, rent vouchers look the best bet yet.

Update
Edward Glaeser and Joseph Gyourko present a road map for a new Housing Policy for the US, with strong emphasis on vouchers. The full policy text is available here.