Thoughts on affordable housing XI

This post in the series on affordable housing discusses the importance of transportation investments in promoting housing affordability. 

In an excellent 2014 paper, Katharina Knoll, Moritz Schularick, and Thomas Steger show that property prices remained constant in real terms for the major part of the development stages of 14 advanced economies (studied in the paper), driven in large part by transportation technologies and investments. 

This paper presents annual house price indices for 14 advanced economies since 1870. Based on extensive data collection, we are able to show for the first time that house prices in most industrial economies stayed constant in real terms from the 19th to the mid-20th century, but rose sharply in recent decades… By the 1960s, they were, on average, not much higher than they were on the eve of World War I. They have been on a long and pronounced ascent since then. For our sample, real house prices have approximately tripled since the beginning of the 20th century, with virtually all of the increase occurring in the second half of the 20th century. We also find considerably cross-country heterogeneity. While Australia has seen the strongest, Germany has seen the weakest increase in real house prices in the long-run. Moreover, we demonstrate that urban and rural house prices have, by and large, moved together and that long-run farmland prices exhibit a similar long-run pattern… 

While construction costs have flat-lined in the past decades, sharp increases in residential land prices have driven up international house prices… During the past four decades, construction costs in advanced economies have remained broadly stable, while house prices surged… Our decomposition suggests that about 80 percent of the increase in house prices between 1950 and 2012 can be attributed to land prices. The pronounced increase in residential land prices in recent decades contrasts starkly with the period from the late 19th to the mid-20th century. During this period, residential land prices remained, by and large, constant in advanced economies despite substantial population and income growth…

From the 19th to the early 20th century the transport revolution – mostly the construction of the railway network, but also the introduction of steam shipping and cars – led to a massive and well-documented drop in transport costs, often referred to as the transportation revolution. An important effect of the transport revolution was to substantially augment the supply of economically usable land… We show that this land-augmenting decline in transport costs subsides in the second half of the 20th century so that land increasingly became a fixed factor. At the same time, zoning regulations and other restrictions on land use also inhibited the utilisation of additional land in recent decades while rising expenditure shares for housing services added further to the rising demand for land…

Glaeser and Kohlhase calculate that the average cost of moving a ton a mile was 18.5 cents (in 2001 Dollars) in 1890 but had fallen to 2.3 cents at the beginning of the 2000s… The length of the railway network can serve as a proxy for the opening up of new territories over time. For our 14 countries, the length of the railway network peaked in the interwar period and has not grown materially since then… By 1930, essentially the entire world had been made accessible. Subsequent expansions of the transportation network through highways did not lead to a comparable fall in transportation costs… The dramatic efficiency gains in maritime transportation were also realized in the late 19th and early 20th century. The 19th century revolution in shipping rested on two developments: first, the fall of iron and steel prices that led to the introduction of metallic hulls; second, parallel advances in engine technology that led to much improved fuel efficiency Between 1870 and 1914 shipping costs fell by about 50 percent relative to the prices of commodities. By contrast, commodity-deflated real freight rates barely fell after 1950.

They offer a reinterpretation of David Ricardo’s hypothesis (made in the context of agricultural land, specifically where corn is grown) that, since land is a fixed factor, in the long run, economic growth will disproportionately benefit landlords. Further, given the unequal distribution of land, the rising land prices is likely to worsen inequality. They write,

The decline in transport costs kept the price of residential land constant until the mid-20th century. Yet the price surge in the past half-century could be an indication that Ricardo might have been right after all.

Illustrating the insights on the interaction between transportation developments and land prices, Binyamin Applebaum in the Times has an excellent article which shows how Tokyo has become a standout success in affordable housing on the back of a housing development strategy that revolves around mass transit. It has become the largest city in the world while also remaining affordable for its residents. Here’s a striking statistic.

Two full-time workers earning Tokyo’s minimum wage can comfortably afford the average rent for a two-bedroom apartment in six of the city’s 23 wards. By contrast, two people working minimum-wage jobs cannot afford the average rent for a two-bedroom apartment in any of the 23 counties in the New York metropolitan area.

This success comes with its costs and benefits

Maintaining an abundance of affordable housing has its downsides. Green space is scarce in Tokyo, living spaces are small by Western standards, and relentless redevelopment disrupts communities. But the benefits are profound. Those who want to live in Tokyo generally can afford to do so. There is little homelessness here. The city remains economically diverse, preserving broad access to urban amenities and opportunities. And because rent consumes a smaller share of income, people have more money for other things — or they can get by on smaller salaries — which helps to preserve the city’s vibrant fabric of small restaurants, businesses and craft workshops.

This is an important pointer to how Tokyo has managed a balancing act between urban growth and affordable housing.

From the air or from one of the city’s many observation decks, Tokyo appears as a vast sea of low- and midrise buildings laced with archipelagoes of high-rises, each island marking the location of a station along one of the city’s railroad lines.

This brilliantly captures the evolution of Tokyo’s housing landscape.

The Tokyu Railways Company developed the Den-en-toshi, or Garden City, line, which stretches southwest from the city center, in the 1950s as the backbone for a series of suburban neighborhoods of single-family homes… As Tokyo grew and demand for housing increased, the railroad has rebuilt the areas around its stations with condominium towers, shopping malls and office buildings. Around Futako Tamagawa Station, the largest of these new urban centers, Tokyu knocked down more than 100 homes to make way for more than 1,000 units in new apartment towers, as well as a new headquarters for the technology company Rakuten… 

The communities around the stations have grown denser, too, with apartment buildings interspersed among single-family homes. The population served by the Den-en-toshi line has increased from 20,000 people to more than 600,000. And the railroad, which once ran two-car trains three times an hour, now runs subway-style trains every few minutes, many of which continue into central Tokyo on a subway line. “We consider ourselves as a city-shaping company,” Hirofumi Nomoto, then chief executive of Tokyu, said in a 2016 interviewafter the completion of the Futako Tamagawa redevelopment project. “In Europe, for instance, railways companies simply connect cities through their terminals. That is a pretty normal way of operating in this industry, whereas what we do is completely different: We create cities.”

In stark contrast to Tokyo, cities like New York and others have stopped investing in mass transit lines and have strict restrictions on development along existing lines. And the consequences are evident in terms of housing unaffordability. 

This transit-led urban growth model has been supported by the city’s remarkably liberal zoning regulations.

In Tokyo, by contrast, there is little public or subsidized housing. Instead, the government has focused on making it easy for developers to build. A national zoning law, for example, sharply limits the ability of local governments to impede development. Instead of allowing the people who live in a neighborhood to prevent others from living there, Japan has shifted decision-making to the representatives of the entire population, allowing a better balance between the interests of current residents and of everyone who might live in that place. Small apartment buildings can be built almost anywhere, and larger structures are allowed on a vast majority of urban land. Even in areas designated for offices, homes are permitted. After Tokyo’s office market crashed in the 1990s, developers started building apartments on land they had purchased for office buildings.

Tokyo makes little effort to preserve old homes. Historic districts subject to preservation laws exist in other Japanese cities, but the nation’s largest city has none. New construction is prized. People treat homes like cars: They want the latest models. Between 2013 and 2018, new homes accounted for 86 percent of home sales in Japan, according to the most recent government data. In the United States, new homes typically account for about 15 percent of sales, according to data from the National Association of Realtors. One reason Tokyo looks forward is that little remains of the city’s past. Earthquakes, fires and American bombers destroyed much of the prewar city, and after the war, the rush to provide housing and the nation’s relative poverty produced a city that wasn’t meant to last… New buildings, and their occupants, also are more likely to survive the next earthquake… The ease of building in Tokyo means that new construction is not synonymous with luxury housing. Small workshops and factories are common…

Parks, too, are sometimes treated as unaffordable luxuries. Parks and gardens occupy just 7.5 percentof the city’s land, far below the figures for New York (27 percent) and London (33 percent). Mitake Park, once one of the few green spaces in the dense Shibuya neighborhood, is being transformed into a 26-unit apartment building. In the nearby neighborhood of Shinjuku, the government this year authorized construction of three high-rises that will eat into the Meiji Jingu Gaien, one of the city’s oldest and best-loved parks.

In another article in the Nikkei Asian Review, Benjamin Banzal and Jorge Almazan provide a nice description of Tokyo’s urban form.

After the firebombing of 1945, rebuilding was chaotic. Black markets flourished around train stations, while a severe housing shortage was often met with makeshift wooden homes on tiny plots, rather than large public housing. The government, constrained by weak institutions and scarce resources, was in no position to guide the city's recovery. When Japan's economic miracle took off in the 1950s, much of Tokyo's growth was driven by small, labour-intensive workshops embedded in residential districts. Zoning was flexible. Mixed-use, live-work arrangements were commonplace. Production chains were held together not by vertical corporate hierarchies but by horizontal social ties and local agglomeration economies. Subway expansion gradually allowed the city to grow outward, easing pressure on the center. Population density thus evened out across the metropolis. From above, Tokyo's vastness appears homogeneous, but its neighbourhoods remain distinct -- unified more by a shared set of local amenities than by architectural design. 

These amenities -- sento bathhouses, mom and pop stores, small manufacturing workshops, construction and building material contractors, eateries -- were tightly interwoven into the urban fabric and often owned and operated by local inhabitants, anchoring employment in neighborhoods. This model proved both functional and socially cohesive. With little open space, residents placed planters on pavements. Festivals were organised block by block. Economic growth did not produce stark urban divides. Tokyo remained relatively egalitarian in spatial terms.

The compact neighbourhoods that emerged in post-war Japan resemble the lightly planned, dense, mixed-use localities with small plots, narrow roads, limited public spaces, and low-rise multi-tenanted housing that characterise the majority of localities across all Indian cities. They have emerged organically through development by the original small plot owners, and encompass both slums and lower-middle and middle-class housing colonies. 

While in India, these colonies have largely remained stuck in time, with a slum-like quality of basic infrastructure. In contrast, Japan's provision of infrastructure and liberalised zoning regulations have allowed these colonies to become vibrant neighbourhoods that have retained their original character and social cohesion. 

The foundations of what we call the "Tokyo model" include dense, low-rise neighborhoods of around 20,000 residents per square kilometer woven together by narrow streets, gradually upgraded over time. Urbanism was "emergent," that is bottom-up and responsive to local needs… Private railway conglomerates such as Tokyu, Keio and Seibu also played a central role. They captured real estate value along their commuter rail lines -- building commercial hubs around stations and housing developments further out. In turn, Tokyo's transit system became one of the most efficient in the world, and helped spread the neighbourhood model across the metropolitan region… 

A mix of three phenomena around train stations added dynamism to this urban model. First, shotengaishopping streets, often covered arcades, branch off from station plazas and are filled with small, owner-run stores. Second, yokocho alleyways emerged when postwar black markets were regularised, allocating compact plots to bars and restaurants. These alleys still foster a strong sense of community. Third, zakkyobuildings -- narrow, multi-tenant towers on small lots -- stack diverse uses vertically, with their characteristic (neon) signage testifying to the vibrancy within.

Tokyo's urbanism has never been static. Over time, manufacturing gave way to services. Stricter environmental rules and broader economic shifts pushed industry out of the inner city. Height limits were relaxed, and taller apartment buildings began to rise along major thoroughfares. Since the 1980s, however, Tokyo's urban policy has increasingly tilted the balance toward top-down development. Floor-area-ratio restrictions were eased significantly. Special planning zones were introduced with looser urban restrictions. Tall, mixed-use towers -- especially near train stations -- became much easier to build, particularly since 2002… These towers often concentrate hundreds of apartments in a single building…

Unlike other countries that have incorporated tools for public participation, Tokyo's planning remains largely in the hands of powerful institutions: the central government, the Tokyo Metropolitan Government and its 23 special wards all have a say in decisions and have systematically sided with developers. As public consultation is minimal, community voices are rarely heard or often overruled. Over 200 redevelopment projects have already been completed since 2002 -- mostly in central areas like Roppongi, Shibuya and Toranomon. Many more are in the pipeline, including a second Roppongi Hills. As central areas will inevitably reach saturation at some point, developers are looking further afield in search of yield.

This is a good summary of the balance Tokyo has achieved between renewal and social cohesion. 

The Tokyo model deserves more recognition -- not out of nostalgia, but as a viable framework for future growth. Its buildings are constantly renewed. Its shops shift with demand. Its density supports both economic dynamism and social cohesion. It is a model built for change.

While I have quoted the trajectory of change in Tokyo’s urban form, the article itself cautions against the pace of change, which threatens the local character and social capital, replacing compact localities with homogeneous, gentrified high-rises. 

This has important lessons for developing countries like India, where the largest cities are already bursting at their suburban seams, mired in traffic congestion, and housing affordability is an acute crisis, with urban growth prospects facing strong headwinds. Sample this FT long read on Bangalore. 

The Tokyo example has strong relevance since Indian cities, too, are characterised by similar dense localities. Indian cities must create enabling mechanisms to allow them to shape and accommodate economic growth dynamically. It should allow, over time, pockets of high-rises to emerge so that the localities combine people from all economic classes.

This is important because the emerging landscape of India’s urban growth is that of older localities (both slums and middle-class colonies) frozen in time, increasingly congested, and with poor quality infrastructure (interspersed with pockets of affluent colonies), and suburban growth of homogeneous high-rise gated communities, interspersed with slums and squatter settlements. This is a deeply inefficient, unequal, socially dissonant, and growth-constricting form of urban development. 

A fundamental insight in urban development is that, given the fixed extent of land available in any city, there are only two ways to increase supply. The first is to develop vertically by raising the Floor Area Ratios (FARs), a topic discussed extensively in this blog (also this paper). The other option is to expand outward to encompass suburbs, while simultaneously building transportation infrastructure that shrinks the suburban sprawl and lowers commute distances. Tokyo illustrates how the combination of the two can keep housing prices affordable.

Transportation has traditionally been a performative aspect of urban planning in India, confined largely to instruments like road widths, land-use, and transport infrastructure creation (roads, Bus Rapid Transit, and metro railways). Unfortunately, public policy actions have largely been a form of isomorphic mimicry by transplanting top-down technocratic institutional arrangements (like UMTA/MTA and concepts like Modal Integration and Transit Oriented Development) that have worked in the cities of mature developed economies, without any thought for their integration with the local urban planning norms and without any meaningful social and political engagement and ownership by those stakeholders of the need for such changes. Even when implemented, they have remained only in form and have had little to show as substance. 

Accordingly, over the last two decades, we have seen that large transportation investments are made with limited changes to the master plan norms on land-use, FAR, and other measures to use the opportunity (presented by those investments) to shape urban growth and the future of the city. This is most egregiously manifest in the investments being made in new roads, road widenings, ring roads, BRT lines, metro-railway lines, and (now) the railway station redevelopment projects. In all these cases, there’s rarely any conscious, highest-level engagement to capitalise on the infrastructure investment’s geography-shrinking and housing supply-increasing potential by leveraging urban planning instruments. 

I blogged here that instead of being stand-alone PPP projects undertaken by the Indian Railways, railway station redevelopment projects should be viewed as urban regeneration projects that lay the foundation for the future of the locality and the broader city itself. I blogged here on the need to utilise metro railway investments as an opportunity to shape urban form by densifying the well-connected localities around stations through higher FAR and mixed land use. This and this are illustrative examples of transit-oriented development from London.

In conclusion, Indian cities require policy action at two levels. On the demand side, municipalities should adopt liberal planning regulations, such as those in Japan, that encourage renewal and vertical development, where feasible. The development of infrastructure,ties should complement thi roads and utilis. On the supply side, all transportation investments, especially metro rails, BRTS, or bus routes, should be approved only after easing planning regulations to permit significantly increased FAR and mixed-use developments around mass transit stations. This post provides more details on how to achieve such renewal.

Thoughts on Affordable Housing X

A feature of the housing markets is that they are rife with market failures. Specifically, as I had blogged earlier on multiple occasions, left to itself, the market will not be able to meet the affordable housing demand. 

In this context, one influential argument is that increasing the supply of housing stock of any kind will invariably translate to reducing affordable housing prices. Supply trickles down market segments and puts downward pressure across them. I’m not sure. 

John Burn-Murdoch points to two important features of the housing market and writes that increased housing supply of any kind generally contributes to containing the rise of affordable housing prices. 

The first is about the cascading effect of the supply of market-rate housing on the affordable housing market. 

Market-rate dwellings will simply go to people on higher incomes, leaving lower earners high and dry. But recent studies from the US, Sweden and Finland all demonstrate that although most people who move directly into new unsubsidised housing may come from the top half of earners, the chain of moves triggered by their purchase frees up housing in the same cities for people on lower incomes. The US study found that building 100 new market-rate dwellings ultimately leads to up to 70 people moving out of below-median income neighbourhoods, and up to 40 moving out of the poorest fifth. Those numbers don’t budge even if the new housing is priced towards the top end of the market.

The second is that gentrification does not generate the disturbing displacement of lower-income residents from the areas they have lived and worked for long. 

Another argument is that building market-rate housing in a lower-income area leads to gentrification, with higher earners moving into a lower-income area and displacing the incumbents. But the latest research from Britain and the US shows that there is typically little, if any, outward displacement of incumbents. It is the incomers who have been displaced, priced out of wealthier areas by supply constraints. In other words, even if you think it’s inherently bad if high earners move into poorer neighbourhoods, the answer is to build more market-rate housing for those higher earners.

In this context, the example of Milan is instructive. There have been stories across news outlets in recent days about Milan’s real estate boom and the corruption scandal that has broken out involving local officials, politicians, and real estate developers. It involved developers bribing local officials and politicians to fast-track permissions in violation of the city’s planning regulations and obtain illegal building permits. 

Over the last decade, there has been a spectacular surge in the demand for high-end residential property, which has been reinforced by tax concessions. 

In 2015 Milan hosted the Universal Exposition, seizing the chance to demonstrate that the once provincial and austere financial capital of Italy was morphing into a vibrant global city, thanks in large part to the 340,000-square-metre urban regeneration plan. Since the Expo… the city’s property market has attracted €30bn in investment and thousands of wealthy international residents, lured to Italy by generous tax breaks. Since 2016 Italy has offered new residents a flat-tax charge on unlimited overseas income, a fee that rose from an annual €100,000 to €200,000 last year. The country has enticed wealthy expats who deserted the UK after its Labour government last year scrapped the popular “non-dom” regime, which offered residents whose permanent home was abroad up to 15 years without paying tax on money held overseas.

The result of the supply boom has been gentrification, with large parts of the city itself being gentrified. 

Two decades ago the drab suburban district north-east of central Milan — once characterised by railway yards and factories making Pirelli tyres and Breda steel — was so desolate and plagued with crime that regular Milanese would never think to visit. Today it is the city’s most exclusive neighbourhood, home to global bankers and billionaires. Its curved and gleaming UniCredit tower was designed by the late architect César Pelli, renowned for Kuala Lumpur’s Petronas towers. Nearby is the Bosco Verticale, a pair of skyscrapers where apartments sell for up to €25mn to private equity executives, footballers and Middle Eastern investors. The glitzy Porta Nuova district was masterminded in large part by one man: Manfredi Catella, who led the Italian arm of US property asset manager Hines, then acquired the former Hines division through his family’s real estate vehicle Coima in 2015, building up the district with backing from Qatar’s sovereign wealth fund… 

Complaints about the multiple high-rise developments that sprang up, mainly in working-class districts, triggered a series of investigations into alleged fast-tracking of building permits and bending of the rules by local authorities. Since the beginning of last year more than 100 building sites, in which several Italian and foreign developers had invested close to a cumulative €12bn, were seized by authorities, stalling construction. Most of the seized developments had been sold off-plan, leaving 13,500 would-be homeowners in limbo.

However, the supply boom has not triggered the type of cascade that the studies cited by Burn-Murdoch highlight, and instead has spawned a housing affordability crisis. 

The boom… made housing less affordable for average Milanese families. Residential real estate prices in Milan have risen by 50 per cent since 2016, reaching an average of €5,500 per square metre, 2.5 times the national average, even as real wages declined. The rising costs have drawn criticism from right-wing and populist parties who have accused the mayor, a popular figure among Milan’s elite, of favouring “real estate speculators” and foreign investors over average households.

See also this

The number of foreigners who made Milan their home after a flat tax on foreign earnings was approved in 2017 are in the thousands, but their ranks are set to increase this year after the UK scrapped its so-called non-dom regime that exempted tax on foreign earnings. For a city of only 1.4 million inhabitants, with a dearth of high-end properties on the market, this influx of affluent foreigners — and Italians returning from abroad, also attracted by a favorable tax treatment — has sent valuations soaring, pricing out locals… The average price to purchase a residential property in Milan was €5,532 per square meter at the end of June, a 52.5% increase since 2016, according to data from Immobiliare.it, a real estate online platform. In Rome, prices rose 3.4% to €3,607 in the same period, the data show.

In general, I’m inclined to believe in trends similar to those in Milan in developing countries like India. The main reason is that the pent-up demand for higher-end housing, both for living and as speculative investment, is much greater in Indian cities. This means that the incremental supply will only go on to keep meeting the pent-up demand and will struggle to trickle down to the affordable housing market.

Another reason is that the gap between market housing and affordable housing is so wide that they get segregated into distinct geographical locations, with the latter relegated to the suburbs. Gentrification further accentuates this segregation. Besides, private housing developers find the margins of affordable housing so low as to be unattractive as a commercial proposition. In any case, from the developer’s perspective, the demand for market-rate housing is so high that it’s foolish to overlook it and venture into affordable housing. 

The Business Standard has a good article that shows why market dynamics are unlikely to be able to provide an adequate supply of affordable housing in India.

While demand for sub ₹50-lakh affordable housing prevails, market players cite increased land rates, escalated construction costs and low margins as key prohibiting factors. Some like Mahindra Lifespaces are moving out of the segment, while others are reducing their share of the housing portfolio dedicated to affordable housing… Developers are, however, keen on luxury housing supply where higher costs are mitigated by higher end-user charges and hence better margins, on the Ebitda level. Compared to 10-15 per cent margins in affordable housing - which can easily erode if projects get delayed - high-end residential projects offer Ebitda margins of 25-30 per cent, said industry insiders.

Recently, Mumbai-based Mahindra Lifespace Developers announced its exit from the affordable housing segment by FY28-29… Gurugram-based Signature Global, which started with affordable housing, pivoted to mid-income stock premium housing — ranging between ₹2 crore and ₹4 crore — in the last couple of years, due to rising land prices… According to PropEquity, a listed real estate data analytics firm, in Q2 CY25, there was no affordable housing supply in cities like Mumbai, Delhi NCR, and Bengaluru compared to Q2 CY24. In cities like Navi Mumbai, Thane, Hyderabad, and Kolkata, the supply declined significantly. The affordable supply across the top cities declined by 71.54 per cent year-on-year (Y-o-Y) in Q2 CY25.

“The surge in land acquisition costs, inflated ready reckoner rates resulting in higher stamp duty and registration charges, and steep development premiums make affordable housing financially unfeasible in urban cores. Over 50 per cent of a project’s cost structure is absorbed by direct and indirect taxes, including GST,” Hiranandani added. According to Crisil Intelligence, only 18 per cent of the upcoming residential supply across the top seven cities is estimated to fall in the affordable segment, compared to 45 per cent in the luxury segment… The developers believe that the affordable supply may come, but from smaller developers and in the outskirts of top metropolitan cities… Additionally, the industry experts believe that government intervention is needed in terms of fast-track approvals, land subsidies, credit support, tax benefits, etc., to boost the affordable supply.

A Knight Frank report finds a sharply declining share of affordable housing in the total housing supply in India, even with affordable housing units defined as those up to Rs 5 million. 

Further, the same report also shows that housing prices have risen much faster in the affordable income segment compared to the highest tiers. While this is for MMR, the situation is unlikely to be any different elsewhere. 

It also shows points to a significant affordability gap in the MMR, even with lower unit costs. If the unit cost is Rs 5 million, the gap will become unbridgeable. 

In this context, another article points to how policy changes have contributed to cooling down London’s luxury property market. 

Switching from the “slab” system (where a single rate is paid on the whole purchase price) to a “slice” (where successive bands of the purchase price are taxed at increasing rates) in 2014 may have lowered stamp duty costs for the majority of buyers. But for the sale of multimillion pound properties — which naturally are concentrated in a few postcodes in central London — it increased the stamp duty payable, from 7 to 10.3 per cent of the purchase price for a £10mn home… in 2016… George Osborne introduced the higher rate of additional duty on second and investment homes.

It also shows that while homes priced at £5mn or more might only make up 0.1 per cent of total residential transactions across the country, they account for a far higher proportion of the value of properties transacted (4.2 per cent) and also make up a chunk of the stamp duty collected (11.3 per cent).

This has relevance for India. Housing in India, including the affordable variety, is subject to several taxes and fees - GST of 1-5%, stamp duty ranging from 5-10%, land development charges of 2-5%, premiums and building approval fees of 3-6%, and other municipal fees of 1-2%. In addition, there is the individual/corporate income tax paid by the builders. Currently, affordable housing gets preferential treatment only with a GST of 1%. 

Given the experience of the UK, there may be a case for differential application of these duties and fees for affordable housing here, too, to lower its cost. It could be kept very low to limit the fees and taxes on affordable housing to no more than 5-6%. This concession can be restricted to housing below a certain carpet area and value. Property taxes in India, which are extremely low, could also be increased significantly for larger housing units to offset net revenue loss, if any. 

The lack or limited impact of housing supply on affordability raises important questions about the housing market itself. If high-end housing supply does not necessarily trickle down the market, and can cause gentrification and also widen the affordability gap, it poses a serious public policy challenge. 

It highlights an important aspect of housing. It should not be seen as a typical market-traded good. A home is a vital necessity, and shelter is a fundamental human right. The residential real estate market must first serve its primary purpose of providing housing for all, and only then should it serve investment purposes. If market dynamics have driven property prices sky high, pricing out the middle class and those below, then it’s a market failure that must be corrected through public policy.

While it may today sound retrograde, even stupid, I think that we may not be too far from regulating the housing market to achieve its primary objective. This is especially likely in developing countries, where property markets in the larger cities are already unaffordable to all but the upper-income class. This could involve imposing significant costs and restrictions on very large and opulent housing, and penalising the use of housing as a pure investment (in terms of owning multiple houses) with higher taxes and duties. The differential rates, as in the UK for stamp duty, could be useful strategy in this regard.

Weekend reading links

1. Impressive cost reduction in space technologies.

In the past 15 years, rocket launch costs have dropped from $50,000 per kilogramme to under $2,000. They are expected to dip below $200/kg with Starship — a reusable, heavy-lift launch vehicle being developed by SpaceX.

This is a summary of the opportunities presented by the space economy.

As a factory floor, space offers a set of unique properties. Microgravity assists new assembling habitats that may enable breakthroughs. Pharmaceutical companies have studied protein crystallisation on the International Space Station... Certain alloys can also only be created in low-gravity environments while orbital solar panels can collect energy 24/7, unaffected by weather or nightfall. These could be the next leap in clean energy... The infrastructure that we build in orbit can directly benefit Earth. Space-manufactured semiconductors can power more efficient data centres. Orbital pharmaceuticals could treat previously incurable diseases. Space-based solar panels can provide clean energy... Data companies are training AI on satellite imagery. Hedge funds use this information for commodity trading while logistics companies optimise routes. Companies can use the data provided from satellite imagery to predict retail footfall, agricultural yields, subsurface water location and supply chain disruptions. US based start-up Locus Lock is producing satellite-enabled GPS receivers that maintain ultra-precise accuracy even in compromised environments — critical for autonomous vehicles in dense cities, military operations in contested spaces, and orbital spacecraft navigation.

2. Andy Haldane has a scathing description of the legacy of "independent" central bankers. 

Unquestionably, we are in an era of fiscal laxity. Fiscal deficits across the G7 currently average around 6 per cent of GDP. These countries have collectively failed to run a fiscal surplus this century. That has caused government debt across the G7 to rise well in excess of 100 per cent of GDP, its highest for three-quarters of a century. This is expected to worsen further due to the effects of population ageing, climate change and President Donald Trump’s flagship “big, beautiful bill”. Whisper it quietly, but central banks have played an important supporting role during this era of fiscal laxity. Their direct purchases of government debt — quantitative easing — peaked at well over $10tn, around a third of the outstanding stock at the time. This was monetary financing in all but name. In the immediate aftermath of the global financial crisis, however, such measures were justifiable in preventing an inflation undershoot. Later-stage QE, including purchases made in response to Covid-19, is harder to justify. With fiscal policy highly expansionary, QE’s primary purpose was to placate fretful bond markets rather than boost inflation. In doing so, central banks’ holdings of government debt rose to approaching half of the outstanding stock in the UK and Japan, almost a third in the Eurozone and a quarter in the US. This was a mild, backdoor form of fiscal dominance.

The high deficits and rising debts creates incentives for more fiscal dominance.

In recent criticism of the Federal Reserve, Trump put a precise estimate on the size and source of the benefits from lower rates — $360bn a year in reduced government refinancing costs per percentage point. This signals a far stronger form of front-door fiscal dominance. Because central banks primarily affect short-term interest rates, the risk is most acute when government debt maturities are short and shortening. In the US, two-thirds of government debt outstanding is now under a five-year maturity. Last year, around a third of the debt issued was under a one-year maturity. These patterns are being mirrored internationally. UK government debt has a weighted average maturity of over 14 years. But that too has been falling, with forecast debt issuance averaging a nine-year maturity. The tilt to short-dated issuance has also been seen in Canada, Germany, France and other OECD countries. More than 40 per cent of the OECD’s $50tn-plus in outstanding sovereign debt will need to be refinanced in the next three years. In the face of steepening yield curves, these debt strategies make fiscal sense.

3. Tej Parikh has two graphics on how disconnected the US equity markets have become from its economy.

4. Where's India's version of Scale within its startup ecosystem?

Meta has invested $15bn in Scale AI, a data labelling start-up that claims just 900 employees. Scale’s 28-year-old chief executive, Alexandr Wang, will take up a job at a new Meta lab devoted to creating AI “superintelligence”... Scale AI is both a talent and a data play. The company’s main business is providing high-quality annotated data for training AI models. Now that the big AI companies have scraped most of the internet, Scale’s labelling work can help them improve the quality of their models.

With an increasing number of Western multinationals shifting their core data-related back office functions to India through Global Capability Centres (GCCs), there's a golden opportunity for India to emerge as tthe software development centre of the world. This will create opportunities for startups to come up with solutions like that of Scale. 

5. China's quiet infiltration of the UN system.

A study by Shing-hon Lam of the University of California and Courtney J Fung of Macquarie University found China had nearly 1,600 UN staff in 2022 compared with more than 5,000 for the US, though it is building new staff pipelines through internships... This year, China pledged $500mn to the WHO over five years. Part of this voluntary funding is expected to involve secondment opportunities for Chinese technical and advisory staff... While the ITU is currently led by American Doreen Bogdan-Martin, her predecessor was China’s Houlin Zhao. “The director-general is now American but China put — mostly African — people close to China in high positions, such as the current director of the Development Bureau,” the EU official added. Cosmas Luckyson Zavazava, formerly head of Zimbabwe’s telecommunications agency, is now director of the ITU’s Telecommunication Development Bureau. According to the EU official, he was strongly backed by China, which has close ties with Zimbabwe, including Huawei-led telecoms infrastructure projects.

6.  Important distinction between ICE and EVs.

EVs are fundamentally different from internal combustion engine (ICE)-based cars in terms of where the value is captured. The production process for ICE cars is far more disaggregated, with value — and thus profits — being earned at various places along the supply chain. For EVs, value addition is more concentrated, for example, in the production of batteries. This has serious implications for India’s auto-component sector.

7. Private equity funds increase reliance on continuation funds in times of sharply reduced exits. 

Buyout groups used so-called continuation funds — in which a private equity group sells assets from one of the funds they manage to a fresher fund also managed by the firm — to exit $41bn of investments in the first six months of 2025, according to a report by investment bank Jefferies. That was equal to a record 19 per cent of all sales by the industry, and 60 per cent higher than a year ago... Private equity groups sit on more than $3tn in unsold deals and are nearing four consecutive years in which they have returned only about half the cash investors traditionally expect... Continuation funds give investors the choice to roll over their investment or to cash out. For their private equity sponsors, they allow the firm to keep portfolio companies beyond the typical 10-year life of a fund, and to crystallise performance fees on the assets sold while collecting a steady stream of management fees from the new fund buying the investments.

8.  Kavitha Rao makes some good suggestions on GST reforms. This about the revenue from different rates.

In response to another question in Parliament, Minister of State for Finance Pankaj Chaudhary reported 70-75 per cent of GST collected in 2023-24 came from the 18 per cent rate while just 5-6 per cent came from the 12 per cent bracket. Further, 6-8 per cent of revenues was from the 5 per cent slab, and the highest tax slab of 28 per cent contributed 13-15 per cent last financial year... compensation cess... contributes... ₹1.44 trillion in 2023-24 and ₹1.49 trillion in 2024-25, or 7.6 per cent of net GST.

9. Profile of Viktor Orban, Prime Minister of Hungary since 2010, and the massive system of self-aggrandising crony capitalist system that has been built in the country.  

10. It's beyond imagination how the world is reacting to the genocide in Gaza, and that for 21 months of being played out on live television.

The World Food Program, an arm of the United Nations, said this week that the hunger crisis in Gaza had reached “new and astonishing levels of desperation, with a third of the population not eating for multiple days in a row.”... the number of children dying of malnutrition had risen sharply in recent days... The Gaza ministry of health has reported more than 40 hunger-related deaths this month, including 16 children, and 111 since the beginning of the war, 81 of them children... Throughout the war, U.N. agencies and independent aid groups have accused Israel of allowing far too little food into Gaza, warning of impending famine for its more than two million people... Hollow-eyed, skeletal children languish on hospital beds or are cared for by parents, who gaze helplessly at protruding ribs and shoulder blades, and emaciated limbs resembling brittle sticks. The haunting scenes are a stark contrast to the plenty that exists just a few miles away, across the borders with Israel and Egypt.

France's decision to recognise the Palestinian state will put pressure on others to follow suit. 

11. The US equity markets are on a roll, and it now remains to be seen when and how the reversal will strike. 

Backed by the Trump administration, crypto assets are clearly on a bubble.

The value of global crypto assets reached $4tn for the first time this month as speculators anticipated a deluge of money into the sector in response to new US digital asset legislation. That number again. Crypto’s achievement is astonishing given that it is devoid of intrinsic value and its contribution to the productive economy is minimal compared to that of Nvidia et al. Its chief utility appears to be to enable payments by criminals and to scammers, while gratifying the urges of gung-ho speculators. It is striking that crypto’s performance has even made gold, the traditional if volatile bolt hole for nervous money in dangerous times, look boring...

The great 18th century Mississippi bubble, initiated by the Scottish economic theorist and gambler John Law, obtained exclusive rights to develop land in French-owned Louisiana, along with monopoly rights over the French tobacco and slave trades. Law’s company even took over the collection of French taxes and management of the note issue — all with the backing of the French regent, the Duke of Orléans. Fomo fuelled the bubble until the whole edifice imploded spectacularly in 1720 amid rip-roaring inflation and spiralling government debt.

12. John Burn-Murdoch uses data from the World Happiness Report to point out that youth well-being in Anglosphere countries has been declining compared to stability in Europe. 

The share of young adults regularly experiencing stress and anger has risen sharply over the past 15 years in the US, Canada, UK, Ireland, Australia and New Zealand. But it has been largely stable elsewhere in the west, according to detailed data from the Gallup World Poll used in the report. It’s a similar story for young people’s faith in the ultimate social contract: that if you work hard you’ll be rewarded with security, stability and status. Outside the English-speaking world, confidence in this fundamental tenet of societal fairness is flat across the age spectrum. In the Anglosphere it is high only among the oldest, and in tatters among the young.

He points to a fascinating likely contributor, housing prices. 

In Germany and Spain real house prices have climbed 32 and 44 per cent respectively since 1995. In the US the equivalent figure is 85 per cent, while the UK, Ireland, Australia, New Zealand and Canada all come in north of 200 per cent. The result has been a brutal snatching away of the particularly Anglophone dream of home ownership. Rates of ownership among people aged 25-34 in English-speaking countries have slumped by between 20 and 50 percentage points over the same 30-year period.

Some thoughts on urban planning

 Cities are perhaps the most complex organisational entities on earth. This is most vividly manifest in how cities respond to changes in urban planning instruments. The impact of any change depends on the combination of instruments used, their nature, their respective extent/scope of application, the development stage of the city, and its context. 

Let’s illustrate with the example of how affordable housing supply is impacted by urban planning instruments. 

The supply of housing can happen at two levels. At the intensive margin, it’s about squeezing out more from the same land footprint by increasing the FAR and easing restrictions on height, road width, setbacks, etc. At the extensive margin, it’s about greenfield construction on vacant or under-utilised lands, new areas, and suburban expansions. 

There are two duelling ideologies on this issue. The status quoists, especially among urban planners working with governments, tend to view increasing FAR and easing zoning regulations with suspicion. They argue that allowing more construction would clog the area’s infrastructure carrying capacity and result in congestion and scarcity, even a breakdown of utility services. The progressives, among the commentariat and experts, scorn suburban sprawls and favour high-rise densification through liberalised zoning regulations. They argue that liberalised zoning regulations will allow the market forces to play out and will result in densified developments. 

I’m increasingly inclined to a third messier and nuanced view, especially for developing countries. Their social and political economy contexts, stage of development, and the diverse nature of their housing markets mean that both suburban sprawl and high-rise densification are relevant for them. Both are unavoidable and desirable. 

Ideally, liberalised zoning regulations should incentivise vertically densified growth by lowering the marginal cost of adding a housing unit since it’s added on the same land footprint. The additional unit also ends up lowering the average cost of all the units in that complex. Econ 101 teaches us that these incentives will ensure vertically densified developments. But reality plays out very differently from theory. 

Econ 101 overlooks practical realities that come in the way. For one, vertical densification beyond a threshold increases the construction and maintenance costs enough to offset the benefit of building on the same land footprint. Two, vertically densified development requires solving an important coordination (or market demand) problem. A certain critical mass of buyers is required for the development of high-rise apartment complexes. In general, cities in developing countries or smaller towns anywhere are unlikely to be able to mobilise such demand for any category of housing. Only a small proportion of the expansions, and that too mostly in the largest cities, meet this demand threshold. 

Three, land ownership in the expansion areas is generally fragmented into small parcels. In the absence of consolidation, such expansions happen in a fragmented, staccato manner. And the aforesaid coordination problem prevents such consolidation. Fourth, the housing and land markets are heavily distorted by real estate’s investment attractiveness and the looming presence of black money, especially in the largest and rapidly growing cities of India. The result is that hoarding and speculative transactions among a handful of well-off and/or powerful people dominate these markets in India. Fifth, cultural and economic factors ensure the preference for low-rise developments. Finally, a combination and interaction of all the above means that the vast majority of new developments must invariably happen in fragmented, small land parcels, and the demand for vertically densified developments is justified only when property prices are beyond a certain level. 

All this means that liberalised zoning regulations on their own are unlikely to lead to vertically densified growth in new growth areas, especially but not only in developing countries. Further, given their structural conditions, densified growth is unlikely to materialise in these areas in any significant manner, even with active use of urban planning instruments. Sprawls become inevitable. 

So, what does all this mean?

There’s a strong case that, given their faster growth, cities in developing countries should be allowed to expand at both the extensive and intensive margins. At the extensive margin, cities should be allowed to grow outward, ideally as vertically densified communities, but also as lower-rise developments depending on the local market conditions. At the intensive margin, zoning regulations should encourage the regeneration of blighted and older areas and densified growth in general. 

Both these types of growth will take time to play out. Apart from active intervention through public housing schemes for various income groups, the role of public policy in the housing market is to expedite these plays, both through enabling policies and opportunistic interventions. In the first phase, even with the most liberalised zoning regulations, for the aforesaid reasons, greenfield developments are more likely to be low-rise and lower density. Higher density will emerge only with time, through renewal, market maturity, and much increased demand. In the meantime, zoning regulations should be liberal enough to allow renewal in older and already built-up areas. 

In conclusion, no matter the pathway of change, it’s a highly desirable requirement that zoning regulations be liberalised to incentivise new construction.