Solve problems affecting the Indian real estate market | Opinion – analysis
A recent cover story in theEconomist He focused on what he called the “horrible housing mistake.” He described how an obsession with home ownership in the West has raised housing prices and undermined growth. He correctly blamed the limitations of the supply side and the underlying problems of the political economy. Similar issues affect India’s real estate market and are linked to questions that affect India’s growth: jobs, productivity, inequality.
Housing is a means to access opportunities such as employment or education, most of which are concentrated in cities. Cities are labor markets, where high productivity jobs are created due to economies of scale, scope and agglomeration. Urban agglomerations provide easy access to markets and jobs, reduce search costs, offer reasonable travel times and allow the exchange of ideas, all of which fuels productivity growth and innovation. This simple fact is not appreciated by the Indian political establishment. Instead, an excessive amount of time has been spent trying to keep people out of cities.
To do so, Indian planners implement several tools, the most notorious of which are restrictions on floor space. The floor space index (FSI) prescribes the proportion of floor space that can be built on a plot of land. For example, an FSI of 1.33 on a plot of 100 square meters allows a builder to build 133 square meters of space, as single or multiple floors. When land costs are high or the land supply is limited, a higher FSI reduces the cost of land per unit. Most successful cities have done exactly this. Singapore, for example, allows an FSI of 25 in the commercial district.
The instinct to limit the FSI is based on two conceptual fallacies. The first is that policy makers can limit the number of people in an area by limiting the amount of floor space. The second is that FSI must be linked to the availability of existing infrastructure. On both fronts, reality proves the opposite. As productive cities like Mumbai and Bangalore created jobs, people were willing to take up less space to access job opportunities. Since the formal real estate market was stifled by FSI restrictions, slums proliferated. Prices soared, and space per person fell. The infrastructure (drainage and roads) collapsed under the pressure of increased occupation. This reinforces fears about density, justifying continuous limits.
FSI restrictions combine the density of people with the density of physical space. The density of people is determined by the convenience of a location. The density of space is the amount that can be built in an area. The first cannot be controlled in a democracy, while the second is a matter of regulation. To illustrate, to realize the worst fears about density, doubling the FSI must be accompanied by a doubling of the population. For example, doubling the FSI of Mumbai to 2.6 will only make things worse if the population doubles to 40 million, or simply increases the space per person.
In addition, the construction of the city is a dynamic process. Be it Hong Kong or New York, cities have increased the carrying capacity of their infrastructure as the population grows.
FSI restrictions create other market distortions. The height stops encourage expansion, which requires more kilometers of roads, pipes and increases the carbon footprint. The restrictions reinforce existing inequalities. Given the low FSI, the only way to build an 80-100-story building in a city like Mumbai is to acquire large plots of land. The residents of these buildings have a high quality of life within the walled garden, which decreases the moment they leave the building.
There is much to do. Cities must make the politically difficult decision to liberalize the FSI. The common mistake is that increasing the FSI is a nuisance to developers. In fact, developers would like more FSI, but for themselves, not for the entire city. The latter will increase the offer, benefiting buyers and tenants. Cities like Hyderabad, with unlimited or high FSI, are not full of skyscrapers. The construction of high and expensive towers is justified only if the underlying land is expensive, with the caveat that high land costs may simply be a consequence of restricted supply.
Cities should support the increase in FSI with transportation investments, particularly transit-oriented development, which uses transportation investments to open up new areas for construction. To obtain land for transportation and public space, Ahmedabad has notified the plans of local areas that require builders to hand over part of their land instead of more vertical floor space. Builders compensate for high ground and the city gains ground in the public domain for sidewalks and transportation. In addition, reliable public transportation increases the area of labor influence.
Western housing errors offer a warning story. Today, real estate markets reward owners, while a young and aspirational generation struggles to pay for housing and a foothold in cities. This will eventually result in discontent and an erosion of productivity and wealth that the country cannot afford.
Reuben Abraham is CEO and senior member, and Pritika Hingorani is director and researcher of the IDFC Institute.
The opinions expressed are personal.