Rent control, an analysis…

From Scroll

The Maharashtra state government wants to do away with an obsolete system of rent control that most countries around the world have already discarded, but is facing stiff opposition from tenants who have benefited from nominal rents for decades.

Earlier this month, the government proposed an amendment to the Maharashtra Rent Control Act in a bid to phase out a “first generation” rent control system introduced in 1947. In this system, the state puts a cap on the amount of rent a tenant pays a landlord, and this amount then remains virtually frozen irrespective of inflation and the consistent rise in the market rates over time. Even today in South Mumbai’s numerous rent controlled flats, tenants often pay as little as Rs 300-500 as rent at a time when the market rate is as high as Rs 20,000-60,000.

Most would agree this arrangement is unfair, but tenants of large flats in Mumbai are up in arms against the state government’s latest plan for phasing out the system and moving towards the central government’s draft Model Tenancy Act. In its proposed amendment to the Act, the state seeks to remove tenants of residential homes of more than 860 sq ft – and commercial properties of more than 500 sq ft – from the purview of rent control. If the amendment is passed and implemented, these tenants would soon have to start paying market rates that are, in some cases, more than 200 times the rent amounts they currently pay.

This may be unfeasible for many middle-income families who have inherited large properties, but examples from around the world indicate that rent control can prove disastrous to a city if it is not discarded. The ideal situation, say urban planners, would be to move to a system of rent stabilisation like that of New York or Singapore.

The problem with rent control

European cities first introduced rent control in the 1940s as a means of protecting residents from steep rent hikes around the time of World War II. The system was introduced in Mumbai and other Indian cities around the same time, through various state government acts on rent control.

“The intention of keeping rents at a low level was to prevent speculation and exploitation of tenants,” said Pankaj Joshi, an urban planner and executive director of the Urban Design Research Institute, an urban policy think tank in Mumbai. In its initial years, the system served the purpose of creating affordable housing at stable rents for thousands of urban citizens. “But we have stretched it for far too long now.”

The main problem with the prolonged continuation of first generation rent control, say planners, is that it leads to a consistent degradation of housing stock. When rents are so much lower than prevailing market rates, builders and developers have no incentives to generate more rental housing for urban populations across income levels.

For the past two decades, almost all new housing being built in Mumbai is for ownership purposes, most of it for the upper-middle classes and above. An amendment to the Rent Control Act in 1999 allowed flats to be rented out, without rent control, on a leave-and-license basis for one year at a time. The shortage of housing stock built solely for rental purposes eventually distorts market rates and pushes up the prices of uncontrolled rental properties.

Meanwhile, rent controlled buildings are often unkempt and dilapidated because the nominal rents don’t motivate landlords to spend on maintenance. Instead, rent controls have given rise to the informal pagdi system in Mumbai, where tenancy is transferred from one tenant to another at property rates a little below prevailing market rates and the landlord pockets around a third of the sum to facilitate the transfer on paper.

Around the world

Most cities around the world moved beyond first generation rent control by the 1970s and 80s, either adopting to “second generation” rent control systems, rent stabilisation mechanisms, or removing all forms of rent control completely.

Second generation rent control means that a landlord can raise rents by a certain percentage every year and take increments to cover costs of repairs and maintenance. Cities like Zurich in Switzerland and Manila in Philippines moved to second generation rent controls in the 1980s. New York, meanwhile, is an example of a city that adopted rent stabilisation.

New York

The city took its first steps to decontrol rents in the 1960s, by lifting controls over 7,000 apartments. A Rent Stabilisation Law was passed in 1969 that allowed landlords to charge a certain base rent enough to cover all maintenance costs and taxes. In older rent controlled properties, rents were increased gradually till they reached the base rent.

In further reforms introduced in 1993, the vacant and high-income apartments were decontrolled, and eligibility for rent stabilisation was based on a household’s income level. An apartment can be deregulated from the rent stabilisation system if it is vacated at a rent of $2,500 a month, or if the tenant’s income reaches $200,000. While several instances of malpractices occur across the city, New York state’s governor recently announced that 50,000 illegally deregulated apartments would be brought back into the rent stabilisation fold.

Today, 31% of New York’s rental apartments are rent stabilised and only 1% has rent control.

Malaysia

At the other end of the spectrum, urban planners often cite the case of Georgetown in Malaysia as an example of how rent control should not be dismantled abruptly, but phased out very gradually. The city’s World War-era rent control law was similar to the first generation rent control in Mumbai, with extremely low rents frozen over time and widespread prevalence of illegal tenancy transfer, much like Mumbai’s pagdi system.

When this system of rent control was suddenly repealed in 2000, hundreds of low-income tenants were forced to move out of the main city as they had no protection from the rapidly increasing rent rates. Now, in order to draw more young residents to the city, Georgetown in reconsidering introducing some form of rent control.

Controls that benefit all

The apt solution to Mumbai’s rental housing problem, according to some planners, is not to abandon rent control but improve the system by moving to some form of second generation control, so that lower-income families can also live within the heart of the city.

Rent controls must permit landlords to levy enough rents to cover operating and maintenance costs, repairs and a nominal return, but also protect tenants from owners profiteering over the value of property,” said Hussain Indorewala, an assistant professor at the Kamla Raheja Vidyanidhi Institute of Architecture. “Such controls are a must to stabilise land values and ensure mixed-income neighbourhoods.”

Rent control, according to Indorewala, can do much more than provide low-cost housing. “IT can play an important role in stabilising prices and preventing speculation, thus ensuring affordable housing that benefits even middle and upper-middle income residents.”

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