Home, Sweet Home

When I was young, owning a home was a hopeless dream. Either the company or the government provided shelter to the salaried middle class, and at retirement one scrambled to find a place of one's own and a lower standard of living. But today, this is all changed. Even a young person starting a career can put down a deposit of ten per cent of the cost of a house and can easily raise a fifteen-year mortgage loan, and this explains why the housing finance business has been growing 30 per cent a year for the past four years, and why there is a boom in middle class housing in Gurgaon, Thane, Powai, and many cities of India. This is good news for everyone. A construction boom can become the engine of growth for the entire economy, and especially depressed sectors like steel and cement. Every rupee invested in housing adds 78 paise to the nation's wealth or GDP. House building is also a great generator of employment--a million new houses create 5 million new jobs directly and 7.5 million jobs indirectly. Moreover, owning a home brings social stability, as homeowners tend to be more law abiding and caring of the community. It is not often that one can link growth to reforms, but one can in this case. The housing boom is the direct result of a dramatic fall in interest rates in recent years, from 17.5 to 11.5 per cent, combined with rising tax deductions on home loans. The repeal of urban land ceilings in many states is increasing making land available for building, and soon housing loans companies will be able to repossess houses from those guilty of not paying back their loans. All these factors are encouraging banks to give more loans and owning a house is more affordable. Having said all that, this has been a small revolution, and the dream of owning a home is still distant for most. Of the thirty million middle class families only half a million take home loans each year, which is about the same number of cars that are cars sold in India every year. For an economy that has been growing between 5 to 7 per cent a year for two decades, we ought to have experienced a series of construction booms, just as Shanghai, Bankok, Kuala Lumpur and any number of cities did in the Far East. Like Singapore, these now look like first world cities, and by contrast our Mumbai and Kolkota look like slums. Why is that? The reason is the same sordid tale of bad, unreformed laws, corrupt and lazy bureaucrats, suspicion of the private sector, and “a government that is far too big for the little things and far too small for the big things”. First of all, unclear titles keep land away from the market--by one estimate fifty per cent of the India's land does not have a clear title. If Thailand could fix this problem, and Andhra Pradesh is also doing it, why can't the other states? Second, municipalities in India require roughly fifty separate permissions in order to develop land, and this takes 3-5 years, which is enough to break the back of any honest builder. Third, Rent Control is a powerful disincentive for new building; it penalises the young, and makes our cities look like slums. Again, the answer is simple: enact Delhi's Model Rent Control Law everywhere--it protects the interests of both tenants and owners in a sensible way. Although enacted by Parliament in 1995, traders in Delhi have prevented its implementation. Fourth, stamp duties in India are high--they average 10 percent compared to around 2 per cent in the rest of the world, and this adds to housing cost and restricts demand. On the other hand, property taxes in India are too low--0.002 per cent compared to 1.5 percent in the world--and this means little incentive for municipalities to develop urban infrastructure. Fifth, half the states have still not repealed the vicious Urban Land Ceiling Act, which has kept land away from the market and meant artificially high home prices. These land market barriers mean that India's land costs as a proportion of GDP per capita are the highest in the world, and housing construction has stagnated at only 1 per cent of GDP, compared to 6 percent in Brazil, 5 per cent in Korea, and 4 per cent in the U.S. The same goes for housing's share of employment, which is only 1 per cent in India compared to 4 per cent elsewhere. The answers are, thus, blindingly clear. And they are contained in the government's wonderful 1988 National Housing and Habitat Policy. All we now need is for the government to act on it!

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