When you think of rent, you think of landlords and tenants. Many of us instantly draw a picture in our heads, innuendos of landlords treating their tenants unfairly or the other way around.
To address one spectrum of this problem, that is, the landlord charging the tenant more than the rent price, rent controls were built.
What is Rent Control?
As the name suggests, it is a form of price control which puts a cap on the amount that an owner can charge the tenant as rent in the real estate sector, the cap being a variable and changing with time.
Rent controls are popular because a huge population benefits from them since people seeking to rent out a place are likely to outnumber the number of people giving out a property for rent.
Rent Control in India
Rent control is brought into enactment in any state primarily to shield the tenants from landlords, who may otherwise charge the tenants exorbitant rents, and to eliminate any loopholes which may arise in an agreement between a landlord and the tenant.
Rent controls are popular among renters all over the world, as they seem to offer lower prices with few adverse consequences. In the long run, however, substantial rent controls can cause entire cities to crumble, lacking the necessary dynamism as they fail to take into account factors such as inflation and urbanization in the economy.
The Rent Control Act was passed by the Indian Government in 1948, with each state having its own bye-laws, made in accordance with the state's position at the time the Act had come into force. However, over the years, these laws have now become obsolete.
Mumbai: The Poster Child
Mumbai is often considered the poster child for this phenomenon. There is a shortage of rental housing, with very little new stock being created and the existing rental inventory crumbling and falling apart. Over 0.48 million houses lie vacant in Mumbai. This is despite a affordable housing shortage of 1 million units in the city.
A substantial part of Mumbai comes under rent control regulations that date back to the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947. The Act froze rents at 1940 rates or at rates decided by the court.
Let's say Jagmohan moved to Mumbai around the time of partition (one of the reasons why the government imposed rent controls at that time was to facilitate immigrants like Jagmohan). He rented a house from a landlord at INR200 a month at that time.
The rent of the properties let out thereon didn't keep up with inflation and urbanization. Over 70 years since, Jagmohan or his children who now live in that house still pay a few hundred rupees per month to stay in the apartment which now would easily cost over a lakh per month in the market! In South Mumbai’s numerous rent controlled flats, tenants often pay as little as INR300-INR500 as rent at a time when the market rate is as high as INR20,000-INR60,000.
These rent controls also protect the tenets from any forced eviction by the landlord.
Over time and after multiple amendments being passed, the Maharashtra Rent Control Act, 1999 replaced the 1947 legislation, however with little change to the rental prices or eviction rules.
A major problem with such prolonged continuation of first generation rent control is that it leads to the degradation of housing stock.
With landlords practically getting nothing off the nominal rents, they often give up on the maintenance and upkeep of the house, leaving the properties in unkempt and dilapidated condition. Tenants who might have rented the place some 50-70 years back refuse to vacate the property. With an excruciatingly slow judicial system at play, many law suits filed remain stuck in the courts for decades.
When rents are so much lower than the prevailing market rates, builders and developers have no incentives to generate more rental housing. For over two decades, almost all new housing being built in Mumbai is for ownership purposes, most of it for the upper-middle classes and above. Shortage of housing stock built solely for rental purposes eventually distorts market rates and pushes up the prices of uncontrolled rental properties.
The Way Forward
Most economists agree that a ceiling on rents over time reduces the quantity and quality of the housing available. However, will it help the cause if rent controls are completely done away with? Not really! If the tenants presently occupying rent-controlled properties are pushed to start paying the market rates, in some cases, they might even have to pay more than 200 times the rent amount they currently pay. Moreover, with a lack of affordable housing in the city, completely abandoning rent controls may not be a viable solution for the mid and lower income groups.
Lessons from Overseas
The city of New York took its first steps to decontrol rents in the 1960s, lifting controls over 7,000 apartments. A Rent Stabilisation Law was passed in 1969 that allowed landlords to charge a certain base rent, which would cover maintenance costs and taxes. In older rent controlled properties, rents were increased gradually till they reached the base rent.
Further reforms introduced in 1993 decontrolled vacant and high-income apartments, 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. At present, over 31% of New York’s rental apartments are rent stabilized.
Some cities like Zurich and Manila moved to second generation rent controls in the 1980s. 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.
A plausible solution to Mumbai’s rental housing problem is to allow landlords to levy rent adequate to cover operating costs, maintenance and ensure a nominal return. Tenants must simultaneously be protected from any form of harassment from the landlord.
Therefore, instead of completely abandoning rent control, the maximum city must gradually move towards some form of second generation control, and overtime perhaps aim for rent stabilization.
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