Why Delhi Landlords Are Not Happy

Owners of rent-controlled buildings in Delhi have been getting a pittance as rent for decades. The rent has not risen much in decades because authorities did not periodically raise it in line with inflation and rising property rates in the neighbourhood. Recently, in a reply to an RTI (right to information), the Centre said that the proposed reforms in rental laws would not be implemented anytime soon, meaning the Delhi Rent Act, 1958, will stay unchanged for now.

The problems

Tenants in rent-controlled properties are a minority with many entitlements in Indian cities like Delhi and Mumbai. Landlords need tenants' permission to renovate buildings, redevelop them, or use them for some other purpose.  Also, when rent controls are in place, people are also likely to live in large apartments even when they do not need much space. This shows landlords of rent-controlled buildings do not have much of a choice.

Property in Delhi's central business district Connaught Place, for example, is highly expensive, while the official rents are negligible. Even though rent controls were imposed to protect low-income tenants, many people who use such buildings now are wealthier than their landlords. Such tenants often rent out the property to others, collecting unusually high rents.

Policy conflicts

The policies of the Central government are often in conflict with one another. The government recently formulated a rental housing policy for migrants under the Social Rental Housing (SRH) scheme. But, one of the most important components of affordable housing is low-cost rental housing for migrants. Migration to large Indian cities is much lower than global average at present, which was at its peak in 1940s, when rent control laws were implemented. As this was the same decade in which India became Independent, this may be partly because of people moving to large cities seeking government jobs.

But, the steep decline in migration is also because rental housing became very expensive in metropolises due to a shortage in the rental stock. In every Indian city, the stock of rental housing has declined since 1950s. (The decline in Mumbai is over 70 per cent.) The reason behind this is fairly simple.

When you prevent people from renting out a house at higher than the rate stipulated by authorities, not many landlords will be willing to rent out properties. It is contradictory as rent controls were imposed to cure the problem of housing shortage and high rents during the first and second world wars but they have led to a shortage of rental housing.

This is true throughout the world. In New York's Manhattan, for example, finding a good apartment is difficult. But, rent controls and zoning regulations in Manhattan are not anywhere as stringent as in Delhi.

For example, if the market rent for an apartment in a neighbourhood in Delhi is around Rs 50,000, not many landlords will be willing to rent out houses if the government lowers it to Rs 25,000. This is because renting out houses has suddenly become an unprofitable business. When rent control regulations are in place for many decades, not many people will build houses and buildings to rent them out. So, the supply of buildings and housing stock will not rise much over decades. For housing prices to decline the supply of housing should rise.  For example, when the demand for mobile phones rose, the price of mobile phones declined, too. This is because there was great competition among mobile phone manufacturers to bring down prices.

The only way to make housing more affordable is to raise supply relative to demand. This means that we cannot make housing affordable without raising the quantity and quality of housing stock.