Rental boost

The model law can help fix a struggling housing market

Urban India has a dysfunctional housing market. Too few houses are available for rent; those that are on sale are priced out of the market. As a consequence, there is both unfulfilled demand and a large inventory of vacant apartments. The Economic Survey 2018 estimated there were almost 500,000 vacant houses in Mumbai alone, and Delhi and Bengaluru possibly had about 300,000 apartments standing empty. Perhaps 12 per cent of the housing stock in urban areas of India is not occupied for living, in spite of millions of households who wish to buy or rent not finding satisfactory houses. The Survey blamed “unclear property rights, weak contract enforcement and low rental yields” for this structural problem. Home owners are unwilling to rent out their houses because the legal framework is loaded in favour of tenants. For similar reasons, there is a premium on ownership of a house, so that rental incomes are much smaller than the equivalent mortgage costs. This further depresses the incentive to rent out a house. In other words, the absence of proper and reliable contracting has led to a breakdown in the market. 

The government is to be commended for taking this long-standing problem on board and for seeking to address it. In the Budget for 2019-20, Finance Minister Nirmala Sitharaman promised that a new model tenancy Bill would be drafted by the Centre and sent to the states. The Bill has a lot that would help untangle the knots in residential real estate in India. The most important task is to reduce the probability of high-cost and traumatic events to both renters and landlords. Thus, for example, there are rules governing the supply of essential utilities, since some tenants are forced out by homeowners through the simple expedient of cutting off electricity and water supply. Nor can landlords revise the rent sharply upwards in the middle of a tenant’s lease, either, under the draft legislation. Tenants must be given three months’ notice. Landlords, on the other hand, are promised recourse against the possibility of a tenant overstaying. Rent will double for the first two months and scale up to four times the base rent thereafter.

One particularly important question is whether any such law can be policed properly, and whether disputes will be settled in a timely fashion through the legal system. The problem with contract enforcement in India is not necessarily the terms of the contract, but that the judicial system can be so clogged that disputes over control of an asset can outlive the useful lifespan of that asset. The draft Bill suggests a new court exclusively to judge rent-related disputes. However, it should be noted that the experience with dedicated courts of this nature has been mixed in India — as is seen most recently with the delayed timeframes of resolutions under the Insolvency and Bankruptcy Code. The idea of creating independent regulators and authorities in each state is a better one. The problem is one of dispute-settlement capacity, and that is what the government should now address on priority. If it succeeds, one of India’s most intractable problems will have a long-awaited solution.