Summary

This article discusses the effect of rent controls in Mumbai, and how they have affected the availability of housing in the city. It also discusses who are the gainers and losers from rent controls. Lastly, it discusses the ideology behind rent control, and argues why rent control laws are not ‘pro-poor’ legislation, but are, in effect, anti-poor.

A version of this article was published in the Indian Express in 2006. 

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RENT CONTROLS
by Nitin Karve

“In many cases, rent control appears to be the most efficient technique presently known to destroy a city – except for bombing” – Assar Lindbeck, a Swedish economist. 

If at all this assertion can be faulted, it is for being an understatement – Mr Lindbeck over-estimates the relative efficiency of bombing. In cities like Mumbai, rent control has proved a more efficient weapon of destruction than even bombing.

Bombing raids are events which cease once a war is over. They do not preclude the future revival of a city.  On the other hand, rent controls create a lasting stranglehold on the vitality of a city.  To evaluate which technique has proved to be the more damaging one, one could compare Mumbai in 1945 with any German city which was then recently destroyed by bombing, and compare the same two cities today.

In Mumbai, rent controls were introduced just before World War II. They were strengthened during the war to help tackle war-time inflation.  The controls applied to all housing and offices. The size of the property, and the income and wealth of the tenant did not matter. They were applicable even when the tenants were companies or firms, whether Indian or foreign. The rent control laws did not allow for adjustments towards inflation.

Rent controls were then seen, and are often seen today, as a measure of ‘social justice’. In other words, rent controls were seen as a rich-vs-poor issue. Hence, modifying or relaxing these controls has mostly been a ‘no go’ area for all ‘pro-poor’ politicians.

The losers

In reality, the biggest losers from rent control are persons who want to be tenants, i.e. the poor who wish to find a new place in the city. Rent controls dissuade prospective landlords from coming on to the market with housing for rent.  This is a fairly predicable response to market signals.  The result is that there is no rented housing available for the poor in Mumbai. 

Among landlords were insurance companies.  For insurance companies, rented commercial premises were very often a major avenue for investing their funds. A poor return on such funds can have a direct effect on returns on life insurance policies as well as on the premiums on all policies. 

Compare the absence of rented housing today with the situation before the World War II.  For a century or so, the growth of the city was catered to by rented housing of all kinds and for all pockets. 

The supply of rented housing gradually died out after the War. Over a period, rented housing became available only to the upper classes. Even this supply dwindled when rent controls were extended to ‘leave and licence’ arrangements in the 1970s.

Slums

The result of this lack of supply is seen in the phenomenal explosion of slums all over the city.  People who sought rented housing were denied that facility, and were offered instead the next best alternative – encroachment!

Given a choice, today’s slum-dwellers would have wanted legal rented housing. They have been forced to obtain illegal housing which is inferior in all respects to even the poorest rented chawls. The cost is higher, and there is always a sword of illegality over the head.  Abolishing rent controls could therefore be the most ‘pro-poor’ step conceivable for tackling the city’s housing problem.

The gainers

The biggest gainers from rent control were existing tenants – individuals or commercial organisations. 

Incidentally, not all landlords are rich, nor are all tenants poor.  In South Mumbai, many tenants are fairly well-to-do.  Commercial tenants, in particular, represent the economic cream of society.  The biggest beneficiaries of rent control were large industrial houses and multinational companies. 

Some of the largest Indian industrial groups and some large foreign multi-nationals were protected tenants, and they shamelessly abused rent controls.

Some partnerships were bound together not by mutual goodwill, but by a mutual interest in a protected tenancy.

Around the country, prominent lawyers were among the proud possessors of large prime properties of which they were protected tenants. 

An unexpected class of beneficiaries of rent controls have often been employers.  In the absence of a free market for rented housing, the free market rent for a prospective employee’s house is never considered to be a factor while determining employee remuneration.  Often, an employee is either a protected tenant paying a negligible rent, or owns his house.  In either case, he does not feel the pinch of a monthly outgo of rent. This depresses expected remuneration levels.  On the other hand, when people from other cities have to find their own housing in Mumbai, they seek a much higher compensation level than the locals as they have to bear the full market rent.

The city as a loser

Because of rent controls, the city as a whole has also been a loser.  Its urban landscape has been wrecked.  Many buildings in the older parts of the city look shabby and rundown as landlords cannot afford to maintain buildings.

The citizens suffer from a lack of mobility and flexibility.  People cannot easily change homes when their work-places change, or when they climb up the economic ladder. 

Even existing individual tenants, who were initially big gainers from rent control, suffered over the long run. Over decades, as maintenance of buildings and of associated facilities has been ignored, the quality of life has gone down for the tenants. The risks associated with living in a poorly maintained building have gone up. 

Above all, outsiders cannot easily shift to the city except at exorbitant cost.  This has been the major reason for Mumbai losing its pre-eminence in the country. 

Mumbai was the IT capital of the country long before that phrase became common.  It has lost that spot.  It will continue to lose knowledge workers so long as there is inflexibility in housing.  Any future restructuring of the city’s economy will also continue to be stifled.

Rent controls have also distorted the city’s tax base, since property taxes were based on the rental values of houses. Rent control freezes the rental value for rent-controlled properties.  Protected rents can be as low as 1% of the free market rent, or less.

Way forward

To resolve the housing problems of the city, it is necessary for all ‘pro-poor’ politicians to come together and force the abolition of rent controls. 

Rent controls are not a socialist policy. They are not a ‘class war’ issue.  Lindbeck was a socialist, as was his fellow countryman, Nobel laureate Gunnar Myrdal. Myrdal observed, ‘Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.’ 

If market forces have to be unleashed to create a supply of rented housing, particularly for the poor, rent control protection should be retained only for old tenancies of deserving tenants, i.e. individuals whose income and/or wealth do not exceed a reasonable poverty threshold. Even in such cases, rents should be adjusted based on the size/ location/value of the property and the income/wealth of the tenant.

In all other cases, rent controls should be abolished.

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