Saturday, May 10, 2014

More on the urban housing challenge

New York's new mayor Bill De Blasio has announced an ambitious housing program (full plan pdf here). It commits $8.2 bn public funds to leverage $41.1 bn in total funding, public and private, over a 10 year period to develop 200000 affordable units - 80,000 new ones and rehabilitate 120,000 old ones.

The public funds would be used to encourage new construction of affordable units, incentivize landlords to rehabilitate buildings which fall under rent-control, and discourage landlords from keeping houses under-occupied. The previous Bloomberg administration had spent $5.2 bn of public funds and leveraged more than three times that from private sources to preserve or build 165,000 affordable housing units over the 12 year period.

The Plan revolves on two factors. One, it embraces a vision for a denser New York, by allowing the possibility of increased floor area ratio (FAR) for new housing projects, thereby encouraging more vertical constructions. Two, it takes a leaf out of cities like Boston and Denver and promotes "inclusive zoning" which mandates developers to include affordable housing in rezoned areas. In other words, developers who benefit from upzoning will have to set aside a small share of their development for affordable housing units. It is hoped that together these reforms would encourage private developers to build more affordable housing units.

The Plan contains several other reforms like lower building setbacks, relaxation on parking requirements for affordable housing units, tax incentives to discourage people from keeping lands vacant or buildings underoccupied, and transferable development rights (TDRs) to owners of underbuilt lands to sell their excess buildable area. However, even this ambitious agenda dwarfs the problem,
In documenting the depth of the problem, the plan notes that the city has about 980,000 households who earn less than $42,000 a year (50% of metropolitan “area median income”) for a family of four—including more than half of its renters—and about 360,000 of them spend more than half their income on rent. It says there are about 425,000 apartments that rent for $1,050 or less (about 40% in public housing), what these households could afford without spending more than 30% of their income on rent. That’s a shortfall of more than 550,000 units. In short, the de Blasio plan would build about 16,000 apartments for this income group—more than twice as many as Bloomberg did, but not quite 3 percent of what it implies are needed.
Further, even as the actually realized benefits from such developments may be marginal, they are more likely to generate other unintended distortions. The previous administration of Mike Bloomberg had encouraged massive rezoning cum redevelopment programs in several dilapidated and neglected neighbourhoods of the city. But one of its unintended consequences was the gentrification of those areas, leading to the increase in rental values in the area. This in turn has had the effect of making New York housing among the most expensive in US and un-affordable for all but a handful of the population.

A study by Furman Center for Real Estate and Urban Policy found that in 2011 only 38% of New York renters live in market rate apartments. The income cap to qualify for a rent stabilized apartment in $200000 per year, and several studies have found that the majority of those enjoying its benefits are those with higher incomes.

The scale of affordable urban housing challenge in developing countries like India is amplified many times over. It essentially boils down to building millions of additional housing units across different income categories. This requires both land and, in case of the lower income group, public resources. In land scarce cities, where unregulated and inefficient sprawls have become the norm, the only way to accommodate the massive demand for additional housing is to go vertical. This requires dramatic relaxation of zoning regulations, and has to be complemented with development of sufficient infrastructural carrying capacity. Further, given the rising construction costs, affordable housing for the foot soldiers of urban growth, the low income migrants, would require large public subsidies. Both infrastructure and housing requires massive investments.

Scarce land and scarcer public resources are hard binding constraints. In the absence of steps that do not alleviate them, no amount of innovation and PPPs can help address India's urban housing problems. In the larger cities, given the practical difficulties associated, PPPs involving up-front LIG housing mandates, as in New York, would contribute only marginally to increasing the LIG housing stock.

There are no innovative solutions to everything. In fact the solutions to some of the biggest social problems are well known, but require surmounting formidable political, social, and fiscal barriers. Urban housing is no different. 

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