Some thoughts on rental market and overall housing situation

 I was listening to this podcast about 'Model Tenancy Act'. The guests are an academic and a bureaucrat with career in housing policy. The premise is there is something wrong with rental market in India and Model tenancy act is there to fix it, at least part of it. Few thoughts crossed my mind while listening to this podcast. I am just listing them down. 

1. Mumbai had a fairly successful model of rental housing during pre-independence period. Multi-story building, called 'chawl' with several small or medium sized tenements which shared toilet (and water-tap till individual taps were provided) facilities where each tenement was a rental unit. Though there is no evidence proving the causal link, the accepted wisdom is, rent control act, brought during the WWII and later continued in post-independence period killed this rental market. 
2. It is this mass rental housing model with assured tenancy till one keeps on paying the rent and upward rental revisions are well-spaced out that needs to be replicated. The form and features of mass rental housing today can be different from the chawls. 
3. It must be understood that mass rental units will be inferior in quality as compared to owned units. The result stems out of second-degree price discrimination behavior of the monopoly supplier. Intuition is simple: if a housing supplier wants buyers with higher purchasing power to buy houses, then rental units should not be desired by these probable owners. 
4. Vacant units are not a problem unless they are unsold and vacant. What to do with a purchased housing units is completely a consideration of the buyer. The same way 'food wastage in a marriage' is not an economic problem, sold and vacant houses is not an economic problem. 
5. Formal rental market in Indian cities seems to be functioning well-enough, barring the problem of frequent contracting. The frequent contracting is seen in two ways: either there are frequent (1 per 11 or 12 months) rent increases (typically 10%, which is seen as a norm) or the duration of rental contract is very short (typically 11 months). Frequent contracting seems to be the manifestation of the 'fear' of tenant becoming de-facto owner of the tenement due to prolong occupation. If true, it is evidently a scar of the institutional memory of 'rent control'. 
6. Frequent contracting adds considerable transaction costs as renters have to move frequently or register their contracts more often. Change of tenant often generates negligible gains for owners since renter who substitutes the old one often starts at lower level of rent or owner has to experience a period of vacancy. 
7. But there does not seem to be a situation of excess demand or very high rents in formal or informal rental markets. Formal rental market, barring problem of frequent contracting, seems to be functioning well and we do not hear litigations of tenants not moving out or owners not able to increase the rents. Large portion of rental market in Indian cities is perhaps informal and there might be considerable efficiency gains to be made there. 
8. Preference for homeownership is a socio-cultural regularity across the world. There are positive externalities of homeownership, which can be replicated only if there are long term tenancies. But households will not choose long-term tenancies unless they cannot choose to be homeowners. 
9. Declining share of rented dwelling is a worrisome sign if this decline is due to fall in new migrants to cities. But if share of rented dwelling is declining along with persistence of migration to cities then it indicates that transformation of the household from renter to owner is quicker than how it used to be. And this is not a bad outcome. 
10. It is only the parts of cities where new migrants account for large share of population, rental market will dominate the housing consumption. For cities which are there for a century or more, there will be parts dominated by new migrants and parts dominated by middle-phase migrants acquiring homeownership. We must investigate the rental market problem at locations where new migrants dominate the demographics. Urban region might not be a right level to examine it. 
11. 'Affordability' is a puzzling term. If something is bought, how can it be unaffordable? Why can't we say we want cheaper housing prices?
12. High real estate prices in Mumbai are due to spatial distribution of economic activity in MMR. Compared to other metropolitan regions, modern white collar jobs (IT, Finance etc.) are still inward located in MMR. In other metropolitan regions, CBDs of these modern white collar jobs are much more peripheral. And what is the another thing that makers MMR an outlier? Yes, the local train network behemoth! Yes, there is a clear link here. It is too cheap to locate peripherally in MMR for a household, which allows them to bid more for housing. The geography adds to it, but that is secondary. 
13. Increase in FSI will not make housing cheaper in MMR. It is not that suppliers will rush to increase the housing if FSI is increased. Housing is a durable good and for durable good supplier in non-competitive setting, optimal decision is too supply lesser so as to reduce future competition from quantity sold in the past. With TDR policies, FSI is not really a binding constraint. 
14. The redevelopment entitlement, cross-subsidized by the formal market buyers and lack of government initiatives in developing peripheral CBDs - these are the prime drivers of expensive housing market in MMR. 
15. It is not politically rational to address this mess. The local politics in MMR is dependent on surplus generated in real estate markets which is dependent on extremely centrifugal commute driven, homeownership market.