Three alternatives for implementing rent control deregulation in Mumbai
While rent control deregulation is needed in Mumbai, the Model Residential Tenancy Act being proposed will cause too much of a shock for poorer tenants. Robin Houterman proposes three alternative strategies to lessen the blow and improve the rights of poor tenants and their access to the housing market.
Earlier this month I explained how rent control deregulation in Mumbai might affect the availability of affordable housing in the short term, but also criticised the way the Indian Ministry of Housing and Urban poverty Alleviation tried to introduce a generic approach to deregulation with the Model Residential Tenancy Act (MRTA), published in 2011.
As I wrote, while the Maharashtra Government is likely to force the MRTA through the local authorities by tying it to financial regulations on other housing issues, this is not a guarantee that local authorities will introduce the MRTA unamended. The question of rent deregulation is highly political. Tenants form a larger constituency than landlords and therefore it is unlikely that the proposed act will gain the political support it needs to become approved as is.
More gradual deregulation
For landlords, this would ensure that rent revenues will be sufficient to make long term investments, which should stimulate developers to build for the rental market.
In light of this I propose three alternative strategies that would have less harsh consequences for poorer tenants, and that could take away some sitting tenants' opposition to rent control deregulation.
The first strategy is to deregulate rents more gradually. This means that the negative effects of rent control may taper off more slowly, but the negative effects of deregulation will be mitigated. More gradual rent increases should depend on the estimated market value of flats and the income of tenants. The market value information collected for stamp duty can be used to define rent increase percentages based on housing quality.
A more gradual deregulation might gain more support under tenants, though it is likely that some tenants will continue to oppose it. The process may stimulate a gradual reshuffling of tenants within the rental sector, without affecting less affluent tenants in the short term. An increase of rents based on income levels will help to stimulate people that can afford it to move to other housing, especially when they can move to housing of better quality in new construction projects. For landlords it might be acceptable as they have the prospect of market rents in the foreseeable future.
Reconsider ownership of properties
The second strategy generally accepts the time frame of deregulation in the MRTA, but proposes that when lease renewal negotiations between landlords and tenants fail, a forced buyout will be triggered that could go either way. The buyout price should be based on market prices, with either landlords paying 60 per cent of the market price to the tenants, or the tenants paying 40 per cent of market value to the landlords. When both are unwilling to pay these amounts, the price should be further negotiated. In the case that neither landlord nor tenant can or wants to buy the property, it would be auctioned by the state and the revenues divided between landlords and tenants on a one-third to two-thirds basis.
This strategy, an outcome of several brainstorm sessions with housing experts at the Urban Design Research Institute in the summer of 2011, has been proposed to the Chief Minister of the Government of Maharashtra in slightly adapted form. Its main aim is to overcome the fact that many tenants must pay a substantial sum of key money (pugree) to their landlords when first renting a property, and thus will be forced to stay in their current properties even when rents skyrocket.
Reconsidering ownership puts more pressure on landlords to negotiate as otherwise they might be required to sell their properties for lower than the market price. Tenants would feel better supported in rental renegotiations. Tenants that cannot pay higher rents nor buy their properties will still have to move out, but they will obtain a significant sum of money as compensation.
State support for poor tenants
A third strategy would be for the State to step in and guarantee that poorer people are not driven into substandard housing by rent control deregulation. One way could be that properties occupied by low income households would be bought by a state or municipal body, such as the Mumbai Metropolitan Region Development Authority (MMRDA) for one-third of market value and maintained as affordable rental stock, keeping current low-income tenants in their existing residences. Effectively this would resemble the formation of a social housing sector as is known in many western European countries such as the Netherlands.
What becomes clear is that a discussion about rent deregulation should be embedded in a broader vision of the provision of (affordable) rental housing in the future and the role of the state.
State support for poor households would take away the fear that those households would be forced into substandard housing. Admittedly, this probably would not take away opposition to deregulation from more affluent tenants.
Making them work
The outcome of each of these strategies would be a full liberalisation of rents for newly constructed housing in the private sector and confirmation that rent controls will not be reintroduced in the future. For landlords, this would ensure that rent revenues will be sufficient to make long term investments, which should stimulate developers to build for the rental market.
And all three strategies could be supported by other measures to soften the impact of deregulation and mitigate resistance from sitting tenants. For example, by incorporating high levels of tenants rights protection in new tenure legislation, tenants would gain more security against evictions. A second suggestion is that one could require landlords to invest a substantial amount of extra rent income into repairs, increasing the quality of the apartments for tenants. And part of the extra money from rent increases could be returned to those tenants that paid key money to gain access to the apartment.
Admittedly, none of the above strategies form an easy process for abandoning rent control. What becomes clear is that a discussion about rent deregulation should be embedded in a broader vision of the provision of (affordable) rental housing in the future and the role of the state. All strategies require substantial state involvement, whether in terms of actual financial resources to invest in or stimulate construction of rental housing, or in setting up the institutions to collect reliable income data from tenants. Whether the state is willing to spend resources and make the long term commitment will undoubtedly be (and should be) the subject of intense local political debate. To restate my argument earlier this month, unfortunately the MRTA and the terms of its implementation show little space for this.