India has a shortage of close 1.9 cr housing units in urban areas, but 1.1 cr houses in these areas are lying vacant as their owners do not live in them, nor do they rent it out, pointed out housing minister Venkaiah Naidu.
The problem, he said, is being addressed in India’s new Draft National Rental Housing Policy.
India has faced a problem with artificially inflated real estate prices for the last several years due to an inflow of money into the country. Whenever the flow of money increases, it leads to an increase in prices of all items.
However, increased flow of money does not push up prices of all items in India. The reason is that, in India, ‘excess’ money is not being diverted to consumption activities — such as buying cars or taking foreign tours, but only to buying assets — primarily real estate.
This is because of the nature of the excess income. Most of the excess income comes in the form of either illegal funds (such as bribes) or untaxed funds (such as business profits).
As a result, if this excess income is used for buying anything and everything — such as cars and foreign tours — income tax authorities will start raising questions about the source of the money.
However, when buying houses, 30-50% of the money can be given in cash and not recorded in official records. As a result, people who do not wish to pay taxes on their income, or who cannot pay tax on their income (due to the income being illegal), have no option but to either keep their money in cash or invest in real estate. Since keeping the money in cash will not give any return, people invest in real estate.
The side-effect of this phenomena is the increasing price of houses and flats in India that has made it almost impossible for most normal people without illegal or untaxed income to buy houses.
For example, an average two bedroom flat in Mumbai costs between Rs 50 lakhs in the suburbs to around Rs 7 crore in the island city.
Given that the average person has a disposable income of only around Rs 2-3 lakhs per year in a city like Mumbai, it will take 15-25 years of savings for that person to buy a flat even if it is situated far away from the city center.
If he or she instead decides to take a 30-year loan for that amount at 10% yearly interest, he or she has to pay Rs 43,879 per month as EMI. However, instead of doing this, he can rent that same apartment for just around Rs 6,000 per month.
Since the average person in Mumbai earns only around Rs 40,000 per month, he or she naturally prefers to live on rent.
On the other hand, people who have illegal or untaxed money face no such dilemma, and buy up the flats that was originally meant for the middle class office-goer.
The problem, as the housing minister pointed out today, is that the so-called real estate ‘investor’ then keeps the building vacant, hoping that the value of the flat will rise in the next 3-4 years and he can sell it at double the price.
This has led to shortage of houses for the middle class and salaried people — as new houses are bought by ‘investors’, as well as to the curious phenomenon of entire townships of vacant flats that serve purely as a speculative investment.
Naidu pointed out that investors do not give their houses on rent since the income of salaried people — and therefore the rent that they can pay — is very less compared to what the investors have put in. In other words, rental yield is low.
In addition, “rent control laws.. poor maintenance, low quality of construction, fear of losing control and emphasis on ownership housing are adversely impacting investments in and availability of rental housing stock in the country,” the minister for housing said.
In countries where house prices are not as high — or middle-class salaries are much higher — more people are willing to give their houses on rent.
For example, rental housing in India accounts only for 11% of total housing stock while it is at a high of 35% in the Netherlands, 31% in Hongkong, 23% in Austria and 20% in the United Kingdom.
Naidu said the government will try to address the problem of vacant houses with its new National Rental Housing Policy. The policy seeks to enable a vibrant and formal Rental Housing sector by adopting regulatory and legal reforms, enhancing fund flows, promoting institutions for constructing, managing, maintenance and creation of rental housing stock, along with necessary incentives, he added.