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Wednesday, May 03, 2017

Why are so many houses vacant?

by Sahil Gandhi and Meenaz Munshi.

Urban India has a severe shortage of housing, yet Indian cities have many vacant houses. According to the census of India 2011, out of the 90 million residential census units, 11 million units are vacant; that is about 12% of the total urban housing stock consists of vacant houses. To put these numbers in perspective, consider the houses constructed by the central government under its three largest programmes related to urban housing: Jawahar Lal Nehru National Urban Renewal Mission (JNNURM) (2005-Extended till March 2017), Rajiv Awas Yojana (2011-2015) and Pradhan Mantri Awas Yojana (urban), altogether only provided 1.1 million units. The total vacant housing stock may not exactly match - in terms of quantity and type - the requirements of the households crowded out of the housing market. But this paradox of vacant houses and a shortage of housing, is a symptom of the distortions in the functioning of land and housing markets.

To put the gravity of the vacant housing situation in perspective, let us compare the situation in Indian cities with a few international cases. Gurgaon and Pune have more than 20% and Mumbai has around 15% of their residential stock vacant (see IDFC Institute forthcoming). Internationally, such levels of vacant housing would trigger aggressive public policy interventions. For example, when vacant stock in Paris reached around 7.5% of the residential stock (see Better Dwelling 2017, Planetizen 2017 , Telegraph 2017), the city council proposed to increase council tax rates from 20% to 60% on rentable values on vacant properties. In Vancouver when vacancy rates reached 6.5% of the total housing stock it introduced a vacant house tax (The Globe and Mail 2017).

The housing shortage would be much less severe if the existing housing stock could be used more efficiently. Robert Buckley, former managing director of Rockefeller foundation, asks a similar question in his co-authored piece, "How can the existing urban capital stock help address housing affordability?" (Buckley et al 2016, p. 127). Bringing say 15% of the total (both private and central government funded units) vacant housing stock into the market, could in effect do much more for affordable housing than what PMAY(urban) will be able to provide in the future. Any policy proposals for enabling efficient use of vacant housing stock must be preceded by an understanding of the causes of vacant housing. We look into a few possible causes in a forthcoming IDFC Institute report on making housing affordable by addressing supply side constraints in housing markets. This piece draws from our work for the report.

Vacant housing in Indian states

The census of India 2011 provides numbers on vacant houses in urban India. In the instruction manual for the Census House listing, the instructions for categorising vacant housing are, If a Census house is found vacant at the time of House listing i.e. no person is living in it and it is not being used for any other non-residential purpose(s) write 'Vacant'. Since it is very unlikely that slums will have vacant houses, we can assume that all vacant houses are in the formal sector.

Figure 1 shows the number and share of vacant census houses in urban parts of major states. These 18 states (shown in the figure) together constitute around 95% of the total 11 million vacant houses in urban India. Maharashtra has the highest number of vacant houses (slightly greater than 2 million) followed by Gujarat (around 1.2 million) while Gujarat has the highest share of vacant houses to the total residental stock (around 19%).

Figure 1. Vacant Houses in major States (Urban)

These vacant houses are both government provided and privately owned and have different reasons for being unutilised.

Centrally sponsored housing

Since the launch of JNNURM in 2005, the central government has endeavoured to address the issues of urban housing in India. Under the Basic Services for Urban Poor and Integrated Housing and Slum Development Programme components of the mission and later, with the introduction of Rajiv Awas Yojana (RAY), the government attempted to create housing stock for the urban poor. The UPA government by launching the Pradhan Mantri Awas Yojana (Urban) showed continued commitment to housing for poor in urban areas. However, the success of these schemes can be deemed to be limited if we consider the quantity of houses constructed and the number of those that remain vacant.

In response to questions raised in Parliament in May 2016 and March 2017, the Ministry of Housing and Urban Poverty Alleviation furnished information about the number of houses constructed under the various Centrally Sponsored Schemes that were lying vacant. In 2016, around 23% of total houses constructed were vacant while in 2017, the share of total constructed houses that were vacant was around 17%. It is important to note here that out of the 11 million units vacant in 2011 we do not know the exact number of units built under centrally sponsored schemes. JNNURM was the only urban housing related scheme functioning in 2011. In 2016, 2,24,000 JNNURM sponsored dwelling units were vacant. Assuming the same number of vacant units in 2011 - and this assumption likely overestimates the number - the central sponsored housing formed only around 2% of total vacant housing stock.

Table 1. Status of centrally sponsored housing under JNNURM, RAY and PMAY(U) in urban India
As of May 2016 As of March 2017

Occupied 793,995 964,577
Vacant 238,448 200,677
Total constructed 1,032,443 1,165,254
% vacant 23.1 17.22
Source: Lok Sabha Starred Question No. 256 Answered On May 11, 2016; Rajya Sabha Unstarred Question No. 991 Answered On March 09, 2017

The May 2016 response by the Ministry also provides information on the state-wise break down of vacant houses constructed under the three schemes.

Table 2. State-wise status of Centrally Sponsored Housing
Name Constructed Vacant % Vacant of constructed in state % Vacant in state of India

Maharashtra 128,386 54,282 42.3 22.8
Delhi UT 27,344 26,228 95.9 11.0
Andhra Pradesh 64,942 24,611 37.9 10.3
Gujarat 123,232 23,124 18.8 9.7
Telangana 73,795 17,982 24.4 7.5
Uttar Pradesh 66,169 15,972 24.1 6.7
Madhya Pradesh 34,540 15,737 45.6 6.6
Tamil Nadu 115,713 12,745 11 5.3
Rajasthan 39,924 11,084 27.8 4.6
Chhattisgarh 21,788 10,373 47.6 4.4
Karnataka 48,877 9,431 19.3 4.0
Other States 287,733 16,879 5.9 7.1
Total 1,032,443 238,448 23 100

As one can see in table 2, 10 states and Delhi contribute around 93% of total vacant houses. Maharashtra has the largest number of vacant houses, which forms around 42% of total houses constructed under the three central schemes in the state.

Some rationale for this vacant housing that is meant for the urban poor has been put forth in the policy discourse. Rohini Pande (2017) argues that one of the reasons for high vacancy rates of government built housing is that the poor reject the new housing because of absence of social networks in this type of housing.

On at least two separate occasions (11 May 2016 and 6 April 2017) in the Lok Sabha the Minister and Minister of State of Housing and Urban Poverty Alleviation (Venkaiah Naidu in 2016 and Rao Inderjit Singh in 2017) when asked on the reason behind the vacancy of units have said the exact same thing:

Construction and allotment of houses under these schemes is the responsibility of the State/UT Governments concerned. Due to reluctance of slum dwellers / beneficiaries to shift in cases of relocation projects, lack of / incomplete basic infrastructure and livelihood sources etc., these vacant houses are yet to be allotted by the concerned States/UTs

One crucial takeaway is the importance of location in informing housing decisions. Unless government schemes target creation of houses in sites close to labour markets or areas with access to public transport, public housing schemes will fail in their objective.

Vacant Private Housing: Returns and Risks of Renting

Rental housing can be a significant proportion of housing supply. Rental yields (rent as a share of property price) are the returns a property owner can get on her investment and hence play an important part in deciding the economic viability of investing in rental housing. Rental yields in India are typically very low. For comparing rental yields in Indian cities we make use of user contributed self-reported data available on Numbeo. Figure 2. shows that rental yields, defined as “the total yearly gross rent divided by the house price (expressed in percentages)” for representative Indian cities do not exceed 5% and mostly range between 2 to 4%. Much of the investments in housing stock are done not to earn rental incomes but to gain from capital appreciation or to hide unaccounted money.

Figure 2. Rental yields in Indian cities 2017

Source: Numbeo (as seen on 27 Feb 2017).

For comparing yields in Indian cities with other cities around the world, Figure 2 shows the relationship between rental yields and price to income ratio for cities. The figure allows us to compare rental yields for cities with similar levels of affordability defined as the ratio of income to price. Note that Indian cities have lower rental yields when compared to other cities with similar price to income ratios (See figure 3). Interestingly, all Indian cities (marked in red) in the graph can be seen forming the lower bound.

Figure 3. Relationship of rental yields and price to income ratio (2017)

Note: Indian cities (#16) shown in red, other cities in the world are in blue, a few other international cities are identified in yellow. Data source: Numbeo

The returns from renting out an apartment are low in Indian cities when compared to other cities and other prevailing market investments and they certainly do not reflect the risks involved. Renting out a property is a risky affair in India due to perceived (often, correctly) difficulties of evicting tenants, particularly under the onerous regulatory framework of the various rent control laws that are still applicable across states in India.

Since housing is a subject on the state list, different states have different rent control laws. These laws fix rent for properties at much below the prevailing market rates and make eviction of tenants difficult. As a result, they increase perception of risk and distort incentives for renting. To get around this, leave and licence agreements are being used as an alternate legal mechanism to rent properties. Despite this, the legacy of rent control and policy uncertainty creates reluctance to rent. To provide an example of policy uncertainty, in 1973 the Maharashtra government brought the then existing leave and licensees contracts under rent control (Gandhi et al 2014). Instances like this have had an adverse impact on the confidence of investors and landlords. Further, rent control laws have proved to be very tenacious and difficult to rollback. In 2016, the Maharashtra government tried to amend the Rent Control Act such that residential properties above 847 square feet would no longer be protected under rent control (Tandel 2016). This would have allowed landlords of these properties to increase rents to market rates. However, coming under pressure from the tenants’ associations the government did not amend the law.

The problem is further exacerbated by the slow pace with which disputes are redressed by the judicial system. An account of a High Court case between a tenant and a landlord in Mumbai in Tabarrok (2017) attests to this. The pendency of cases and increase in litigation, even prompted the Supreme court to frame guidelines regarding tenancy agreements (Mohammad Ahmad & Anr v. Atma Ram Chauhan S.L.P. (C) No.6319 of 2007), so as to reduce the number of cases filed by landlords for recovery of rent. It is important to note here that these guidelines are non-binding, and may not lead to any significant change in the situation of the vacant housing stock.

Conclusion

Over the years, rental housing as proportion of total housing has fallen from 54% in 1961 to 28% in 2011 in Urban India (Gandhi et al. 2014). Without a vibrant rental housing market labour markets cannot function efficiently (see Shah 2013). Bringing the private vacant housing stock into the rental market and understanding and resolving the reasons for vacancy in the government provided stock could significantly improve efficiency in utilising available stock of housing. We have the following recommendations and scope for research:

  • Central schemes or missions have provided flexibility to states in order to meet the objective of providing housing for all. However, there is a need to monitor their quality in terms of services provided, accessibility, and links of the dwelling units to the broader labour markets in the urban region. Without these aspects, the units will be rejected by low-income households. There is a need to study state-wise reasons for government sponsored vacant housing. The reasons may differ across states and may require a state specific interventions.

  • More research is required on the reasons behind low rental yields in Indian cities and the possible role of rent control laws.

  • Special fast track courts in states could be set up to handle eviction disputes and guarantee efficient, time bound and predictable settlement of rental disputes.

References

Better Dwelling (2017). Vacant homes are a global epidemic, and Paris is fighting it with a 60% tax. 2nd March.

Buckley, R. M., Kallergis, A., & Wainer, L. (2016). Addressing the housing challenge: avoiding the Ozymandias syndrome. Environment and Urbanization, 28(1), 119-138.

Gandhi, S., Tandel, V., Patel, S., Pethe, A., Agarwal, K., & Libeiro, S. J. (2014). . Marron Institute of Urban Managient Working Paper, 10, New York University.

IDFC Institute (forthcoming). Losing the plot: the supply-side roadblocks for achieving housing for all in urban India.

Pande, R. (2017). Constructing housing for the poor without destroying their communities, Ideas for India, 24th March.

Planetizen (2017). Paris Targets Vacant Second Homes With 60% Tax, 31st March.

Shah, A. (2013). Should policy makers favour home ownership?. Ajay Shah's blog, 3rd June.

Tabarrok, A (2017). A twisted tale of rent control in the maximum city. Marginal Revolution blog, April 2017.

Tandel, V (2016). Why repealing the Maharashtra Rent Control Act is good politics, Firstpost, 13th June.

Telegraph (2017). Britons with property in Paris to be hit with new tax hike. 27th January.

The Globe and Mail (2017). Ontario’s rent and housing reform: 16 big changes, explained in charts. 22nd April.


Sahil Gandhi, is assistant professor, School of Habitat Studies, Tata Institute of Social Sciences, Mumbai and Meenaz Munshi is Senior Associate, IDFC Institute, Mumbai. The authors would like to thank Ajay Shah, Alex Tabarrok, Vaidehi Tandel, and four anonymous referees for their comments and suggestions.

2 comments:

  1. A couple questions as a real estate novice:

    1) How much does Indians living abroad contribute to this? For instance, in our family, our homes are left vacant at least half of the year due to parents visiting children abroad.
    2) While easing rent control and faster dispute resolution will lower the barrier to rent out, what would be the effect of increasing the cost to not rent out (e.g., taxes on vacant houses)?

    ReplyDelete
  2. 1) Investors perceive security in owning a house, ' a roof over one's head', 'a place to call one's own', 'settle down' etc.
    2) Rental Yield is low in India 2-4%. Evicting a recalcitrant tenant may require a decade's effort.
    3) Investors purchase housing may be looking mainly for capital appreciation.
    4) It is widely believed that a lot of unaccounted income is in the form of housing. 5) Politicians like Government housing programs as they can gain kickbacks and also win elections!
    6) One can see poorly-constructed government housing, without roads, water, sanitation etc going unoccupied in many villages across India.

    ReplyDelete

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