Legal Frameworks And Their Impact On Housing Affordability

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– Shivangi Tyagi and Anirudh Burman*

This piece argues that the problem of affordable housing in major Indian cities is a function of the legal restrictions on the use of land. Regulatory restrictions inhibit the appropriate use of land for housing in metropolitan cities in India. We argue that in order to increase the affordability of housing in metropolitan cities in India, such restrictions need to be significantly liberalised through appropriate legal modifications. We provide examples of major cities in other parts of the world, where housing is comparatively cheaper (controlling for differences in standards of living and income) due to more liberal regulations regarding the use of land for housing.

In his paper, Chakravorty argues that property prices in major Indian cities in the recent past have increased due to a demand-supply mismatch. He presents evidence to show that the problem of unaffordability is so severe that Indian cities like Mumbai and New Delhi are vastly more unaffordable than cities like New York and Singapore. In New York and Singapore, around 47 years of accumulated national per capita income is needed to purchase housing in the most desirable neighbourhoods. According to him, for Mumbai, this number stands at 580 years. He also states that in Bangalore, a modest 800 sq. feet flat would cost about 70 years’ worth of average income, which is more than “the years of income needed to buy properties almost twice as large in the most expensive neighbourhoods of the most expensive real estate markets in the world.”

He further argues that the increased demand is related to the high rate of economic growth from the early 2000s. Part of the reason for this high demand comes from companies wishing to set up their establishments. Another reason for this increased demand is the growth in the size of the middle class, income, and access to housing credit in the middle class. Regulatory restrictions on land use prevent housing supply from keeping up with demand.

While new houses have been built to keep up with rising demand, ironically, we have a large and growing vacant housing stock in the country. According to researcher Sahil Gandhi, as per the 2011 census, around 11 million houses were vacant in India, out of which Maharashtra had the highest number. He finds that these houses are both government provided and privately owned, and goes on to state that one reason that the houses are vacant is because of the location of these houses. Regulatory restrictions often incentivise the supply of new housing in locations that are too far from work for most people, or at price points that are unaffordable. Another reason for high vacancies, according to Gandhi, is that rental yields are low, and landlords face other problems associated with renting due to presence of tenant-friendly provisions in state rent-control laws.

To drive down prices, the policy environment in the country needs to enable more supply of housing to match demand.  People willing to build more houses should be able to do so without dealing with various restrictions that do not allow optimal use of available land. This would lead to an adequate supply of housing, which would ultimately reduce the cost of construction, and allow for housing to be built on cheaper land situated in better locations.

Currently, planning authorities have various powers to design policies that put restrictions on land use. Examples of laws that give planning authorities these powers are given below. These powers are often used to put a varied number of restrictions on land use, that do not allow for land to be used to its full potential. This often leads to high prices of land, which in turn contributes to the demand-supply mismatch described above. These powers exist in state laws related to urban planning and development.  For example, in the state of Maharashtra, land-use restrictions can be imposed under the Maharashtra Regional and Town Planning Act, 1966. In Karnataka, similar powers come from the Karnataka Town and Country Planning Act, 1961. Land-use restrictions can take many forms. These include:

1.    Zoning:

Zoning is an urban planning tool where planning authorities decide how land in a particular part of town can be used. Land is divided into various kinds of uses – such as residential, commercial, industrial, etc., and individuals are not permitted to use land for purposes other than the ones allowed in that specific zone.

Zoning laws are present in nearly all Development Codes in the country, including the National Building Code, that represents the desired national standard. It also includes regulating parking spaces, density of dwelling units, and even aesthetics within these zones.

Zoning has been heavily criticized for driving up housing prices, since it tends to make certain ‘desirable’ areas more expensive than others by putting artificial restrictions on the use of land in these areas. A Mercatus research paper quotes the economist Thomas Sowell, who contends that zoning allows public officials to manipulate private property for maximum political benefit and “impose costs on others at no cost to themselves.”

In Maharashtra, section 22 of the Maharashtra Regional and Town Planning Act, 1966 lays down the contents of a Development Plan, which includes “proposals for allocating the use of land for purposes, such as residential, industrial, commercial, agricultural, recreational”. The 1996-2011 plan for the Mumbai Metropolitan Region divided Mumbai into many different zones with different uses for each zone. A similar pattern can be seen with the draft 2016-2036 plan.

Different zones are subject to different land-use restrictions. As the Mercatus research paper argues, regulations like setbacks, density restrictions, extra structures vary depending on the zone the piece of land falls under. It explains that by not allowing optimal use of land, these restrictions create an artificial scarcity which ultimately drives up housing prices, making particular areas completely out of reach for certain demographics. [See pages 4-5]

Higher land prices in the city also leads to ‘urban sprawl’- people spread further out and have to travel long distances to work. It has different definitions, with the Oxford dictionary defining it as “the disorganized and unattractive expansion of an urban or industrial area into the adjoining countryside.” More flexible and sensible zoning regulations can potentially reduce housing costs, urban sprawl and travel times significantly.

Cities all around the world have followed various approaches to zoning from restrictive, liberal to none. Japan, for example, has a liberal zoning policy. The land-use policy does not vary from one municipality to another, but is controlled to a large extent at the national level. There are only 12 zones, decided at the national level. Even the strictest zones allow for different kinds of establishments. This is one of the reasons why Tokyo is one of the most affordable cities in the developed world.

Another example of a city with high affordability as a result of how its zoning laws are structured, is Houston. Houston does not have any zoning laws, even though it has other land-use regulations. For example, property owners can restrict development on their property with private deeds. Houston ranks as one of the most affordable cities in America.

The evidence given above shows that zoning laws create artificial scarcity of land by not allowing optimal use of land. India should consider a similar liberalization of its zoning policies. This could significantly contribute to affordability of housing in India’s major cities. Removing excessive zoning restrictions will allow scarce land to be used for different purposes, and thereby reduce the cost of developing such land. 

2.    Limitations on building heights through FAR/FSI:

FSI (Floor Space Index) or FAR (Floor Area Ratio) refers to how many stories can be built over a particular plot of land. [See Bertaud 2011] A higher number of storeys per piece of land, means land is being put to better use. Since the amount of land in urban centres is scarce, a higher FSI means a city can expand vertically and not just horizontally. On the other hand, a lower FSI means a city would have to expand horizontally, thereby increasing housing prices as well as causing longer commutes. Low FSI limits amount to a restriction in the vertical growth of cities, and contribute to a restriction in the supply of housing.

Alain Bertaud argues that a higher FSI is particularly important for cities like Mumbai, which are constrained by their topography, and do not have as much land available as those located on flat plains.

New York is one major city which is situated on a similar topography as Mumbai. However, the FSI in New York is between 5-15 and in Singapore’s commercial and business areas around 25.

Section 22 of the Maharashtra Regional and Town Planning Act, 1966, provides for the various restrictions a planning authority may put on the height and number of storeys in a particular building, amongst other things. In Mumbai, the FSI ranges from 0.2 to 0.35. According to press briefings, the Mumbai Development Plan 2034 has now increased the FSI in the ‘Island City’ to 3. However, an analysis of the Draft Development Control Regulations for the Mumbai Metropolitan Region, 2016-2036, the maximum permissible FSI is 0.6. The FSI is directly proportional to the size of the plot – making optimal use of smaller plots even more difficult. The FSI is slightly higher in Bangalore, ranging from 1.75 to 3.25. 

Instead of subjecting people to expensive houses and longer commutes, a liberalisation in FSI would help our growing cities expand vertically, reducing housing prices and commutes alike. Liberalisation in FSI must be done after taking into account factors like rural-urban migration, demand for housing, rate of increase in housing prices etc. Since an increase in FSI would mean more dwelling units can be built on a particular plot of land, less land would be required to house more people. The demand-supply equation of land would be balanced, eventually lowering the price of land. Bertaud argues in 2009, Mumbai had one of the lowest consumption of residential floor space. Shanghai was in a similar situation, but the Municipality increased the FSI rapidly, which solved this issue considerably. Indian planning authorities can consider a similar approach to solve its housing issues.

3.    Maximum Ground Coverage:

Maximum ground coverage rules are another land-use restriction that cause suboptimal land usage. These dictate how much of the total available land can be used for a dwelling unit. By limiting how much of the available area can actually be used, it leads to wastage of a scarce resource. For example, a plot of land that could potentially be used to build 4 dwelling units, may be limited to 2 due to maximum ground coverage restrictions. This increases the scarcity of land and housing, since available land is not being used optimally.

While relevant data for Indian cities is hard to find, one can find examples of the correlation between restrictive ground coverage rules and housing prices in other parts of the world. In a paper by Prof. Robert C. Ellickson of Yale Law School, it is argued that by the 1970s, many homebuilders in Palo Alto had converted buildable land into neighbourhoods of single-family houses. These homeowners eventually opposed denser building in their neighbourhoods. The paper states that by the 1970s, Palo Alto’s housing prices were already 20% above the national average.

He also argues that Palo Alto has made various efforts to keep its foothills undeveloped, with only 100 housing units in the foothills and the mountains, which is a tiny fraction of the development in its plains. Palo Alto is currently one of the five most expensive cities in the United States to live in.

Such rules are similarly restrictive in India. For example, in Maharashtra, section 22 of the Maharashtra Regional and Town Planning Act, 1966, allows for planning authorities to make regulations regarding percentage of building area of a plot. In Karnataka, section 12 of the Karnataka Town and Country Planning Act, 1961 allows for planning authorities to prescribe similar restrictions.

Rule 15.5.3.7 of the 1996-2011 plan for the Mumbai region states that for a layout area of 10 hectares, minimum 15% of it will have to be recreational open space. Similarly, in Bangalore, for a residential plot size measuring 4000 to 20000 square metres, only 50% of the land can be used for building purposes. The rationale for these requirements is not mentioned in these development codes. However, any safety and environmental aspects can be improved by mandating infrastructure that would address these issues. A more rational approach would be to impose less restrictive measures that balance safety, environment and aesthetic concerns with affordability.

By imposing requirements that require too much open space to be left out, these regulations constitute an artificial restriction on supply of land, which fails to meet its demand. This in turn causes high prices and the problem of unaffordable housing. It is essential to liberalise these rules in sight of the increasing population in urban centres, so the total available land can be utilised to an optimum level, thereby increasing the supply of housing to meet its demand.

To alleviate the problems of housing unaffordability, governments often come up with policies on affordable housing. These include schemes like Pradhan Mantri Awas Yojna for the country, authorities like the Slum Rehabilitation Authority in Mumbai, other schemes and programs. The PMAY-U (Urban), for example, seeks to provide an approximate of 10.5 million houses against a rural-urban migration number of 78 million people (according to the 2011 census). While these efforts may alleviate the problem to some extent, taxpayer money spent on these programs could have been saved and put to other use if legal restrictions on land-use for housing in cities were liberalised/removed.

Even though many of the consequences of these laws are obvious, they still continue to exist. This is because land scarcity and housing scarcity drives up prices and this artificial increase in prices is beneficial to existing householders and landowners and others who may benefit from holding on to expensive parcels of land in Indian cities. Laws on urban planning therefore need to be revisited to make sure the dynamism of cities is not constrained.

Developing countries like India pay higher costs for constraining development, and land-use planning powers need to be curtailed to prevent such constraints from being imposed. Planning tools like zoning must be fettered. Lawmakers must insist on an analysis of costs and benefits for every land-use restriction that is imposed. Such analysis must be conducted not just with respect to existing residents and businesses, but also be based on projected needs of new residents and businesses.

In addition, regulations relating to FSI and ground-coverage must be subject to regulatory minimums in addition to maximum limits. Planning authorities should ideally be prevented from imposing FSI requirements below a certain minimum, at least in certain key parts of metropolitan cities.

Laws must also enable civic action to regulate development locally by recognizing private agreements among residents and businesses. Private covenants that limit development locally are often more flexible and equally effective in regulating development, and do not impose city-wide costs.

If Indian cities were not growing at such a rapid rate, the demand would not outgrow the supply so quickly. But the current volume and place of migration means supply needs to catch up quickly. As this piece notes, certain cities have already decided to liberalise land use. However, much more needs to be done at a faster pace.

*Shivangi Tyagi is a Research Analyst at Carnegie India. Anirudh Burman is an Associate Fellow at Carnegie India. Views are personal.

References:

  1. Sanjoy Chakravorty, A new price regime: Land markets in Urban and Rural India, Econ. & Pol. Weekly, Vol. 48, Issue No. 17 (Apr. 27, 2013), available at https://www.epw.in/journal/2013/17/special-articles/new-price-regime.html#:~:text=Land%20prices%20in%20urban%20and,more%20in%20some%20rural%20settings.&text=Similarly%2C%20rural%20prices%20in%20several,very%20high%20by%20international%20standards.
  2. Sahil Gandhi and Meenaz Munshi, Why are so many houses vacant?, The Leap Blog (May 3, 2017) available at https://blog.theleapjournal.org/2017/05/why-are-so-many-houses-vacant.html.
  3. Maharashtra Regional and Town Planning Act, 1966, available at https://mmrda.maharashtra.gov.in/documents/10180/6868243/MRTP+act+1966+Modified+upto+26+th+nov+2015.pdf/d87e0cb2-1674-406a-af50-87e36471509d?version=1.0
  4. Karnataka Town and Country Planning Act, 1961, available at http://dpal.kar.nic.in/pdf_files/11%20of%201963%20(E).pdf
  5. Sanford Ikeda and Emily Washington. “How Land-Use Regulation Undermines Affordable Housing.” Mercatus Research, Mercatus Center at George Mason University, Arlington, VA (Nov. 2015) available at https://www.mercatus.org/system/files/Ikeda-Land-Use-Regulation.pdf
  6. S. Habibi, N. Asadi, “Causes, results and methods of controlling urban sprawl”, Procedia Engineering, Vol. 21 (2011), pages 133-141 available at https://www.sciencedirect.com/science/article/pii/S1877705811048302.
  7. Mumbai Metropolitan Region Development Authority, Draft Development Control Regulations for Mumbai Metropolitan Region, 2016-2036 available at https://mmrda.maharashtra.gov.in/documents/10180/8037279/3.+Draft+DCR+English/a56cea1f-7f25-4e3a-8f88-522fc6287517.
  8. Nolan Gray, Why is Japanese Zoning more Liberal than US Zoning?, Market Urbanism (Mar. 19, 2019) available at https://marketurbanism.com/2019/03/19/why-is-japanese-zoning-more-liberal-than-us-zoning/
  9. James D. Saltzman, Houston Says No to Zoning, Foundation for Economic Education (Aug. 1, 1994) available at https://fee.org/articles/houston-says-no-to-zoning/#:~:text=True%2C%20Houston%20has%20many%20strict,cities%20give%20to%20local%20government.&text=%E2%80%9CIt’s%20more%20affordable%20here%20than,of%20Houston%20economist%20Barton%20Smith.
  10. Alain Bertaud, Mumbai’s FAR/FSI Conundrum, Alain Bertaud (Jul. 20, 2011) available at https://alainbertaud.com/wp-content/uploads/2013/06/AB-Mumbai-FSI-Conundrun-Revised_June-2013_kk-ab1.pdf
  11. Bangalore Development Authority, Revised Master Plan, Bangalore, 2015 available at http://www.dpal.kar.nic.in/Kanunu%20padakosha%20PDF%20Files/Zoning_Regulations_RMP2015f.pdf.
  12. Purva Chitnis, FSI Increased for Residential, Commercial Buildings in Mumbai, Bloomberg Quint (Apr. 27, 2018), available at https://www.bloombergquint.com/business/fsi-increased-for-residential-commercial-buildings-in-mumbai
  13. Robert C. Ellicskon, The Zoning Strait Jacket: The Freezing of American Neighborhoods of Single-Family Houses, Yale Law School, Public Law Research Paper forthcoming(Jan. 7, 2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3507803
  14. What the rural to urban move says about migration, Livemint (Jul. 30, 2019)  available at https://www.livemint.com/news/india/what-the-rural-to-urban-move-says-about-migration-1564424289751.html

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