India's new Model Residential Tenancy Act: a 'one-size' solution that hardly 'fits all'
While India's new Model Residential Tenancy Act is praised as a liberal solution to the lack of affordable housing, Robin Houterman argues that a fast rental deregulation will not only worsen the housing shortage but also weaken low-income households in the overstressed market rental sector of Mumbai.
In 2011, the Indian Ministry of Housing and Urban Poverty Alleviation produced a new Model Residential Tenancy Act (MRTA), meant to provide a basis for the revision of rent control acts around India. It is a liberal act, proposing the abolition of rent control, and leaving rent levels and revisions to agreement between landlords and tenants.
The act's publication revives the already decades-long debate on rent control in Mumbai. Like many other countries, India introduced rent control in the 1940s and 1950s as a means to mitigate high prices due to housing scarcity. Although scarceness is still an issue for affordable housing today, on the whole, the necessity and effectiveness of rent control as a means to secure the availability of housing is no longer self-evident. Rent control is often blamed as one of the causes of scarcity in affordable housing.
Some form of deregulation is necessary; however the main argument here is that the MRTA is largely skewed against tenants and is likely to push poor tenants towards inadequate housing.
Thus while in the short term rent control is supposed to sustain the availability of affordable housing, in the long term it does quite the opposite.
Mumbai's current regulations
Mumbai's first Rent Control Act was introduced in 1947, freezing all rents for buildings built before 1940 on a standard scale. Most of these rents remained frozen at this level until 1999 when the Maharashtra Rent Control Act (MRCA) was implemented and annual rent increases of 4% were allowed. This is exactly half of India's average inflation rate in the last 40 years, thus rents are still decreasing in real terms. Rent increases are also allowed when improvements are made by the landlord, or when charges, taxes or electricity or water rates rise. When tenants change, new tenants can apply to the court to decide upon a standard rent. The Act now covers all rental premises in Mumbai, except those in government buildings and those on an 11-month leave and license contract. Besides regulation on the rent levels, the Act also provides for regulations dealing with landlord-tenant relations, for example setting the conditions under which flats may be recovered by the landlords.
Although the main reason to introduce rent control is to promote the availability of affordable housing, Mumbai's rent control has been heavily criticised for not doing exactly this. Like in other cities with rent control (for example New York), many sitting tenants have remained in their controlled flats for decades and continue to profit from 1940-level rents, thus having little incentive to move. This situation is further complicated by the necessity for new tenants to pay Pugree (key-money), a deposit that must be paid to start a lease, making the little rental housing on offer less accessible for poor tenants. Possibilities to increase rents annually have not made much of a difference yet, as a substantial increase towards market levels takes time.
Furthermore, with rent control, developers have little incentive to build rental housing, deeming it an insufficiently profitable activity. With little new construction on the rental market, sitting tenants who could afford to pay more for their housing have little incentive to move to other flats in the rental sector on the basis of quality. This low mobility of tenants out of rent controlled buildings in turn affects the availability of affordable housing for households with low incomes.
Additionally, with property tax revenues based on rateable values, which in turn are a function of the prevailing rents, rent control leads to low tax revenue for the municipality. This means that there is less public money to invest in affordable housing and other services.
Thus while in the short term rent control is supposed to sustain the availability of affordable housing, in the long term it does quite the opposite. In Mumbai, rent control is associated with the fact that many migrants have had, and still have, to seek shelter in slums. Rent control deregulation, so the argument goes, should improve this situation as developers will start to produce more rental housing.
The Model Residential Tenancy Act 2011
The model act calls for a highly liberalised rental sector. It proposes to remove all regulations on rent ceilings or maximum annual rent increases. Rents have to be agreed upon between landlords and tenants and decided by the Rent Tribunal only in cases of dispute.
By introducing a full liberalisation of rental rates within two years, the model act basically proposes a 'one size fits all' solution which denies the variation in housing market conditions in different regions and cities in India, as well as the varying effects of rent control.
Perhaps the most striking aspect of the model act is the proposal for a quick deregulation of rent levels. Existing tenancies are expected to be renewed within 24 months, setting rents at rates agreed upon between landlords and tenants. If no agreement is reached, landlords may end tenancies in the manner provided by the new regulations. Revision of rent, which can happen any time, is also to be agreed upon between landlord and tenant and will be part of the tenancy agreement, unless tenancies are for a fixed term.
Finally, the act proposes to make it possible for landlords to end tenancies longer than five years without giving any reason. This allows landlords to easily remove tenants when market prices rise at a faster pace than rent increase levels fixed in the individual tenancy agreements allow for. In a housing market as tight as Mumbai's, it is likely that only higher income groups will be able to pay the liberalised rents, both for decontrolled dwellings as well as for new construction.
By introducing a full liberalisation of rental rates within two years, the model act basically proposes a 'one size fits all' solution which denies the variation in housing market conditions in different regions and cities in India, as well as the varying effects of rent control. Of course, states do not have to introduce the model act as proposed and can define their own rental policies. In practice, however, the introduction of the MRTA is likely to be linked to financial assistance under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Rajiv Awas Yojana (RAY) schemes, making it attractive for states to introduce the MRTA as prescribed.
In the case of Mumbai, unamended introduction of the MRTA will probably have large consequences for low income households, either sitting tenants or households looking for affordable rental housing.
Furthermore, the pace of deregulation is set very fast and will be a major source of insecurity for sitting tenants, especially the poorest among them. Within the overstressed rental market of Mumbai, landlords will be able to ask for high rents, not affordable for poorer households. This will leave them with no choice than to move out. With the limited affordable alternatives available in Mumbai, many might have to seek shelter in substandard housing.
The MRTA contains little provision to support tenants in negotiations over rent levels. Such a provision would make rent levels less dependent on shortages in the market. In a market as stressed as Mumbai's, this kind of support is indispensable for all tenants.
Thus although there is a necessity to deregulate rents as it has become ineffective in providing for affordable housing, in Mumbai, the provisions made under the MRTA are likely to worsen the situation on the short term. In my next article I will discuss other options to deregulate rents with better short term outcomes.