Decoding The Connection Between Urban Planning and Real Estate Prices

Urban planners rarely pay attention to residential real estate markets. But, it is impossible to plan the development of a city ignoring real estate prices. They are a source of valuable information. Recently, Union Urban Development Minister Venkaiah Naidu said the government would extensively consult citizens to plan cities. However, even if urban planning is done after consulting citizens, all their needs and preferences may not be met. The reason is, of course, that residents of a city need not have all the information that is necessary to give reliable answers. Moreover, in many cases, they may act on information they have not yet verbalised. For instance, residents of an area may believe that crime rates are high where they live. However, high residential property prices in the neighbourhood may suggest that this is probably not true.

There are many other reasons why urban planners should pay attention to real estate prices.

• Urban planners tend to think that real estate prices in cities such as Mumbai are volatile because of rampant speculation. While this may be true in some cases, often real estate prices rise or fall because of regulations, especially regulations that control the density of building like the floor space index. (Floor space index (FSI) is the ratio of floor area to the area of the plot on which a building stands.) Blaming volatility of real estate prices on external factors often prevent planners from proposing the right solutions. In many cases, planners are unaware of fluctuations in real estate prices.

• If residential property prices are high in a particular city, urban planners can deal with the situation in many different ways. One solution is to increase the building density in the central business district and surrounding areas. This would raise the price of land, but lower the price of residential property because more floor space will be built on a certain amount of land. There are other ways to do so. Authorities can build superior infrastructure in areas father from the city centre. To decide which methodology to adopt, planners may compare the cost of building infrastructure with the increase in residential rent, after the construction of additional infrastructure. If rental rates and residential property prices rise tremendously after roads or water mains are built in suburbs, this means that the investment passes the cost-benefit test. Real estate in Mumbai, for instance is very expensive because of low building density, poorly developed infrastructure, and urban policies that ignore topographical constraints. 

• In many cases, urban planners focus on the cost of building infrastructure while ignoring the benefits. If the benefits vastly outweigh, the effects would be disastrous. Former World Bank researcher Alain Bertaud once observed that for every thousand Rupees the Indian government spends in developing infrastructure in major Indian cities, they would create a value of millions of Rupees. For instance, superior infrastructure would increase the supply of developable land, lower commuting distance and time, and make labour markets function more efficiently. To accurately estimate the benefits, planners should rightly interpret its effect on real estate prices and rental rates.

• Urban planners often plan land use in isolation with other sector of the economy. But, land use policy should bear a strong relationship with real estate prices. For instance, if industrial outlets are located in the heart of the city where real estate prices are high, many obsolete enterprises would face huge pressure to relocate to suburbs if land use policy does not restrict them. It often happens that land is very valuable in areas where the government enforces low-density building. This artificially raises home prices. Real estate in Delhi, for instance, is expensive partly because valuable urban land is occupied by government agencies and powerful politicians and bureaucrats. 

• In cities, the organisation of urban spaces have much to do with culture and history. If urban planners plan land use based on successful policies in the West or elsewhere, it may fail. To formulate plans that are in harmony with the needs of people, it is important to interpret variations in price signals when land use policy changes.

• To decongest cities such as Mumbai and Delhi, governments often plan satellite cities. But, in many cases, people who live in satellite cities work in the metropolitan area and many who live in the metropolitan area work in satellite cities. Instead of decongesting cities, this raises commuting times, and compels people to live in satellite cities, where infrastructure is not adequately developed. In such cases, raising density in the central city would have been more efficient. Real estate prices send out valuable signals in such situations.