How Rent Control Act Hurts Delhi Tenants & Landlords Alike
Data show that nearly half of Delhi's population lives in slums or unauthorised colonies. Among various other reasons, the Delhi Rent Control Act, which has been challenged in the Delhi High Court recently, is responsible for the present state of affairs. The Act, its critics claim, hurts the interests of landlords and tenants in equal measures. Landlords in the national capital's central locations such as the City Zone, the Sadar, Paharganj Zone, Karol Bagh Zone and Civil Lines do not pay house tax because their earnings from these rent-controlled properties are meagre. Tenants of such properties also refrain from paying taxes because they fear that the property will fall out of the rent control regime if they pay the tax. Apart from making housing expensive, rent control laws are also the reason why many buildings in Delhi are poorly maintained.
However, Delhi's experience is not unique. Throughout the world, rent control laws make housing expensive and hurt the interests of landlords and tenants, especially the low-income households. Unlike other Asian countries such as Singapore, Hong Kong and Japan which became prosperous as they made housing affordable by repealing rent control laws. In fact, rent control laws were imposed in most countries during the World War-II but were either repealed or mellowed over the next few decades. In Delhi, where the Rent Control Act was imposed in 1939, the law went through an evolution till 1959, but did not undergo major changes.
A look at how the archaic Act hurts Delhi's economy:
- Even though the assumption is that rent control laws help poor tenants at the expense of wealthy landlords, this is often not the case. Tenants in large Indian cities are often a relatively privileged minority. Even in cases in which renting out properties is a market transactions, landlords feel that they do not have much of an incentive to rent out properties. This is extremely harmful to the economy in a city like Delhi, where much of the population migrated from other parts of the country. When there are less apartments in the rental market, because of low supply and high demand, rents of apartments outside the rent control regime will rise.
- The Rent Control Act leads to low foreign investment in Delhi. Investors are unwilling to put money in the construction industry fearing that their property might fall under the rent control regime.
- In commercial space, rent-controlled properties hamper market process. For example, if a store in Delhi's central business district, Connaught Place, is under rent control and another is not, the former would have an undue advantage. The operating costs of the store, which pays market rent, would be much higher and it would be hard for such a store to compete against the other.
- As world economies are becoming increasingly globalised, inter-city migration is also gaining huge significance. If your services are more valuable in Delhi than in Mumbai, it should be easier for you to migrate from Mumbai to Delhi. For this to happen, rent control norms should be less stringent and apartments and office spaces easily rentable.
- Rent control also hinders urbanisation by raising the cost of moving from villages to cities. When people move from villages to cities, they do not have much capital to begin with. The presence of rent control makes the transition even more expensive. Rent controls also encourage slum developments. Outside the purview of formal markets, these comparatively cheaper informal dwellings flourish freely.
- Rent control lowers the number of opportunities in the construction sector. Because of rent controls, redevelopment of properties is less likely to happen. This is because landlords do not prefer to invest heavily in properties that they rent out for small amounts of money, and cannot easily sell. Moreover, the investments in the real estate sector decline, too. This further lowers investments in the construction industry.
- Rent control makes it easier for tenants to misappropriate properties. This makes encroachment of property a common practice in India.
- Rent control laws allow people to live in large apartments even when they do not need much space. For example, elderly or single people who lives in a large rent-controlled apartment would keep occupying more space than needed because they don't have to pay much as rent.