Unreal state of the real estate sector

The travelogue Butter Chicken in Ludhiana by Pankaj Mishra, about small-town India, was funny but the joke ultimately is on all of us.

We are aware of inadequate green areas, moon-surface roads, sprawling slums, intermittent/contaminated water supply, power outages/shortages and artificially high-priced housing in many parts of urban India.

All these and related issues merit discussion particularly in the light of the recent rain-induced trauma in Mumbai. However, this article focuses on the compelling case for reforms in the housing segment of the urban real estate sector.

From 1961 to 2001, the proportion of Indians living in urban areas has increased from 18 per cent to 28 per cent. In developed countries, this percentage ranges from 75 to 80 per cent.

For China the number is 32 per cent and for Indonesia 41 per cent. It is inevitable that as India "develops", the proportion of our urban population will grow.

An IIM Ahmedabad study, commissioned by the Housing and Urban Development Corporation, assessed the impact of investment in housing on GDP and employment and ranked it third out of 14 major sectors.

The real estate sector accounts for about 9.6 per cent of GDP (housing: 4.5 per cent; construction: 5.1 per cent) as per our National Accounts Statistics for 1999-2000. Consequently, there are a few initiatives that could have the same level of growth-developmental impact as a push to increase our housing stock.

According to Tenth Plan documents, our urban housing shortage is currently around 9 million units. Further, an Asian Development Bank study indicates that this shortage may reach 22 million units by 2007. The same study also confirms that housing prices, relative to income, are very high in India compared to other countries.

Our housing shortages and exorbitant prices relative to incomes have been caused principally by an inadequate supply of: (a) land; and (b) housing finance for low-, moderate-, and middle-income families. Greater availability of land for housing is constrained by restrictive laws.

For instance, the Land Acquisition Act, 1894, obstructs quick acquisition of land at market-based prices. The Indian Evidence Act, 1872, places the responsibility for proving ownership with the person disputing a possessor's claim. Central and State Rent Control Acts discourage the entry of fresh housing into the real estate market.

The Urban Land Ceiling (Regulation) Act, 1976, was repealed in 1999, but several states have not adopted the Repeal Act as yet. The ceilings range from 500 to 2,000 square metres and are impracticably low for real estate developers.

Even the land acquired by state governments and union territories under this law did not augment supply since most of it was caught up in litigation.

With the haphazard expansion of some our urban areas, many large defence establishments, which were once at the fringes are now close to busy city locations. Land would be released for housing if defence forces were to be gradually relocated away from urban areas.

Other factors inhibiting the supply of land are restrictive zone regulations, high stamp duties (about 8-14 per cent across India, compared to about 1-2 per cent globally), complex land/housing registration procedures, and non-transparent property taxes.

Additionally, housing boards and development authorities, e.g. DDA, monopolise available urban land and there are excessive restrictions on the conversion of land from the rural category to the urban.

Suburban rail and road networks between urban areas and surrounding rural areas are inadequate and, if improved, would effectively increase the supply of land.

A house is usually too large an investment to be paid for upfront by most low-middle-income families. To address this need the government has provided support for housing finance. However, universal coverage would overstrain the capacity of public finance. As such, "market-based" housing finance for lower-income groups should complement government assistance.

In this context, the Indian mortgage loan market has grown rapidly at almost 45 per cent per annum over the last five years. This is from a low base, though, and mostly for higher-income groups. The stock of housing loans in India is currently around 4 per cent of GDP, which is low even by developing countries standards.

In developed countries, the stock of housing finance is comparatively high, e.g. about 73 per cent of GDP in the US.

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando de Soto overstates the importance of land titles in slums.

Irrespective, however, of the soundness of de Soto's conclusions, we need clear land/housing records, particularly for weaker economic neighbourhoods. If verifiable titles were to be readily available, access to housing finance for lower-income groups would improve.

Pension, provident, and insurance funds are long-term investors and should be allowed to invest in correspondingly long-maturity housing finance instruments.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act should promote mortgage securitisation. However, there are legal challenges to this Act and mortgage insurance is in its infancy.

Foreign direct investment and external commercial borrowing norms for real estate investment need to be relaxed further. FDI in real estate could be encouraged by gradually making requirements such as minimum built-up areas, time allowed for completing projects, and taxes the same as for domestic developers.

The RBI is in the process of correcting an anomalous situation in which the National Housing Bank is both a financing intermediary and a regulator. The NHB should drop its regulatory role and become the leading wholesale housing finance intermediary on the lines of Fannie Mae.

It should also be a comprehensive repository of land/housing titles and financing data, and could make such information freely available to the market. There is no incentive for housing finance companies to disseminate this information because they view it as a means of retaining their competitive advantage.

To summarise, considerable attention has been focused in the past on the bottlenecks restricting the supply of land and housing finance. In this context, urban local bodies are inadequately empowered to resolve the issues involved.

One way to fast-forward reforms in the housing sector could be to set up a group of private sector stake-holders/experts and government officials from the various departments concerned. This group could be given well-publicised terms of reference and interim/final deadlines to propose and implement the required steps.