Cost and benefits of residential rent control in Bangalore India

INU- 82 The World Bank Policy, Planning and Research Staff Infrastructure and Urban Development Department Report INU 82 Costs and Benefits of Residential Rent Control in Bangalore, India by Stephen Malpezzi and Vinod K. Tewari June 1991 FILE COPY DISCUSSION PAPER This is a document published informally by the World Bank. The views and interpretations herein are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf.  Copyright 1991 o The World Bank 1818 H Street, N.W. ALl Rights Reserved First Printing June 1991 This is a document pubLished informally by the World Bank. In order that the information contained in it can be presented with the Least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The WorLd Bank does not accept responsibiLity for the views expressed herein, which are those of the author and shouLd not be attributed to the WorLd Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed, the presentation of material, and any maps used in this document are soleLy for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiLiates concerning the Legal status of any country, territory, city, area, or of its authorities or concerning the deLimitations of its boundaries or nationaL affiliation. Work reported in this paper has been financed by two research projects funded by the WorLd Bank: Housing Demand and Finance in Developing Countries (RPO 672-46, directed by Stephen K. Mayo) and Rent Control in DeveLoping Countries (RPO 674-01, directed by Stephen MaLpezzi). However, the views expressed in this paper are soLely the authors,, and they do not refLect those of any organization. The authors are gratefuL for the assistance of many coLLeagues, especiaLly Stephen K. mayo, GwendoLyn Ball, Nachrowi Nachrowi, WiLLiam Stephens and Waleed EL-Ansary provided computationaL assistance. The authors of this report are Stephen MaLpezzi and Vinod K. Tewari. Stephen MaLpezzi teaches at the Department of ReaL Estate and Urban Land Economics of the University of Wisconsin. This paper was written when he was an economist with the Infrastructure and Urban DeveLopment Department of the World Bank. Vinod Tewari is former Dean and currently Professor of Human SettLements Management at the Indian Institute of Management, Bangalore.  The World Bank Costs and Benefits of Residential Rent Control in Bangalore, India DISCUSSION PAPER   ABSTRACT Rent control is more common in developing countries than is commonly perceived. For example, in India rent controls have been in place in most major cities since the 1940s. However, the specific design of controls, their enforcement, and market conditions, vary considerably from place to place within India, and of course even more from country to country. This paper is a case study of the costs and benefits of rent controls in one city, Bangalore, India. Major empirical findings from this paper include the following. Costs and benefits differ significantly between "strictly controlled" and "ordinary controlled" units. Normalizing the market price per unit of housing services at one, we estimate that the typical "ordinary controlled" household would consume 133 units (1974 Rupees) of housing services in the absence of controls and other market imperfections. In fact we observe households consuming 65 units, but spending only 60 (i.e. the price per unit of housing services is 60/65 - 0.92 of the market price). We estimate they would like to consume around 150 units of housing services at controlled prices. But they are constrained by a shortage of appropriate units at the lower price, and they end up consuming less, i.e. 65 units for 60. They benefit from the lower rent but they also lose from consuming less housing than they would consume in the absence of controls. According to our estimates, the loss is greater than the gain from lower rent, and the tenant is worse off than he or she would be in equilibrium at market prices. The loss is greater the lower the price elasticity in absolute value. For the typical strictly controlled household, we estimate that 97 units of housing services would be demanded in the absence of controls and other market imperfections. The typical household actually consumes 107 units, actually a little more than demand at market prices, but spends only 45 (i.e. the price per unit of housing services is about 0.42 of the market price). Strictly controlled households are (compared to "ordinary" controlled) receiving a bigger transfer from a lower price and are closer to their demand curve. These favored households are better off under controls, because they receive a bigger transfer and they also value the transfer at close to its cost to landlords. The bottom line is that rent control reduces the rents households pay, but for the typical "ordinary" controlled household the benefit of this rent reduction is small and is more than offset by the welfare loss from underconsumption of housing. Households under "strict" controls benefit substantially at the expense of landlords. However, gains and losses to "average" households mask large differences in the outcomes to individual tenants in either group. Ordinary controlled renters are higher income than uncontrolled renters, and strictly controlled renters are lower income; but there is a great deal of overlap in their distributions. There is no discernible relationship between income and benefits within the controlled samples. Landlords have higher incomes than tenants who are not landlords, on average; median incomes for the landlord groups are some 70 percent higher than nonlandlord tenants. But there was significant overlap in the distributions.  - ii - Median fair rents are about 42 percent of median estimated market rents. If Bangalore's market had been in equilibrium at our estimate of long run market prices, (i) property tax collections would have been about 2.4 times their actual collection, assuming no change in mill rates or improvements in collection procedures, and (ii) the incidence of the tax would be more equitable, if we adopt the standard that ability to pay is related to characteristics of the unit and/or income of the household. Profitability of rental investment was analyzed. For one representative case the internal rate of return for a controlled unit was estimated at -10 percent. Without controls, such rental housing units could compete for capital with investments yielding real returns of up to 3 or 4 percent. Tenure security depressed returns as much or more than controls themselves. Alternatives for reform exist. Blanket lifting, Permanent decontrol of new construction, decontrol for units that do not meet certain standards, either now or after upgrading, vacancy decontrol, vacancy rate decontrol, rent level or market segment decontrol, contracting out, and floating up and out are among the options discussed. While there is certainly room for discussion of other alternatives, results presented above suggest decontrolling new construction, indexing rents for existing units to general prices, and letting real rents for existing units rise. Any reform package should also include measures to improve the markets for key inputs (land and finance), and regulatory reforms in other areas (e.g. revision of the Urban Land Ceiling Act, building codes, and other regulations).  COSTS AND BENEFITS OF RESIDENTIAL RENT CONTROL IN BANGALORE, INDIA TABLE OF CONTENTS Page Ng. I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Objectives of the Study .... . . . . . . . . . . . . . . . . . 1 Key Questions . . . . . . . . . . . . . . . . . . . . . . . . . 2 B. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . 3 Rent Controls in India ... . . . . . . . . . . . . . . . . . 3 Data and Method .... . . . . . . . . . . . . . . . . . . . . 3 Bangalore's Housing Market ... . . . . . . . . . . . . . . . 4 Rent Control In Bangalore . . . . . . . . . . . . . . . . . . . 4 Costs and Benefits of Controls .5.. . . . . . . . . . . . . . S Distributional Effects . . . . . . . . . . . . . . . . . . . . 6 Effect on Tax Revenue ... . . . . . . . . . . . . . . . . . . 7 Effects on Profitability and Supply . . . . . . . . . . . . . . 7 Reform Alternatives ... . . . . . . . . . . . . . . . . . . . 8 Suggestions for Future Work ... . . . . . . . . . . . . . . . 10 II. HOUSING MARKETS AND RENT CONTROL, IN DEVELOPING COUNTRIES AND IN INDIA . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 A. Prologue: Housing Markets in Develoginz Countries . . . . . . . 11 A Framework for Analysis: How Housing Markets Work .... . . . . . . . . . . . . . . . . . . . . . . 11 B. Overview of India's Urban Housinz Markets . . . . . . . . . . . . 12 Recent Trends .... . . . . . . . . . . . . . . . . . . . . . 12 Urbanization in India . . . . . . . . . . . . . . . . . . . . . 13 Incomes, Prices, and Housing Demand . . . . . . . . . . . . . . 14 Housing Investment . . . . . . . . . . . . . . . . . . . . . . 16 Land . . . . . . . . . . . . . . . 1 . . . . . . . . . . . . . 18 Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . 20 Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 The Regulatory Framework for Housing and Related Markets . . . . . . . . . . . . . . . . . . . . . . . . . 23 Do Regulations Matter? . ................... . 24 C. Rent Control in Developing Countries. and in India . . . . . . . . . . . . . . . . . . . . . . I . . . 27 D. A Brief Review of Indian Rent Control . . . . . . . . . . . . . . 28 Coverage ...... ... 32 Fair Rents . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Implementation of Rent Control Acts . . . . . . . . . . . . . . 33 Effects of Rent Control . . . . . . . . . . . . . . . . . . . . 33  - iv - Page No. III. THE HOUSING MARKET OF BANGALORE . . . . . . . . . . . . . . . . . . . 36 A. Bangalore's Housing Market . . . . . . . . . . . . . . . . . . . 36 Tenure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 House Types and Quality . . . . . . . . . . . . . . . . . . . . 38 Rents, Incomes and House Prices . . . . . . . . . . . . . . . . 40 How Would These Data Look Today? . . . . . . . . . . . . . . . 42 B. Rent Control In Bangalore . . . . . . . . . . . . . . . . . . . . 43 Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Administrative Machinery . . . . . . . . . . . . . . . . . . . 43 Controlled and Allotted Housing . . . . . . . . . . . . . . . . 43 Fair Rent Determination . . . . . . . . . . . . . . . . . . . . 44 Treatment of New Construction . . . . . . . . . . . . . . . . . 46 Security of Tenure . . . . . . . . . . . . . . . . . . . . . . 46 Maintenance and Repairs . . . . . . . . . . . . . . . . . . . . 47 Bangalore's Rent Control in Practice . . . . . . . . . . . . . 47 The Political Economy of Bangalore's Rent Control . . . . . . . 47 IV. PREVIOUS ANALYSIS OF RENT CONTROL . . . . . . . . . . . . . . . . . . 49 A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 B. Descriptive Studies of Indian Rent Controls.. . . . . . 50 C. Analysis of Rent Control Viewed as a Tax on Housing Capital . . 52 Rent Control as Price Control . . . . . . . . . . . . . . . . . 52 Rent Control as Expenditure Control . . . . . . . . . . . . . . 52 D. Estimates of Costs and Benefits, and their Incidence . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 The Basic Model . . . . . . . . . . . . . . . . . . . . . . . . 54 Empirical Estimates . . . . . . . . . . . . . . . . . . . . . . 56 E. Rent Control. Mobility, and Tenure Securit . . . . . . . . . . 60 F. Other Evidence on Distributional Effects of Controls . . . . . . . . . . . . . . . . . . . . . . . 60 G. The Effects of Controls on the "Uncontrolled" Submarket . . . . . . . . . . . . . . . . . . . . . . . . . . 61 H. Supply Responses . . . . . . . . . . . . . . . . . . . . . . . 62 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Reduced Maintenance . . . . . . . . . . . . . . . . . . . . . . 63 Rent Control's Effects on Profitability . . . . . . . . . . . . 64 I. Rent Control's Effects on Government Revenue . . . . . . . . . . 67 Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . 67 Income Taxes. ......69 Inco e T xes . . . . . . . . . . . . . . . . . . . . . . . 6 Increases in Other Government Expenditures . . . . . . . . . . 69 J. Studies which Analyze Alternative Adjustment Mechanisms and . . . 69 K. The Need for Additional Research . . . . . . . . . . . . . . . . 72  -v. Page No, V. DATA AND METHOD . . . . .... . . . . .... . . . . . . . . . . . . 74 A. Data .... . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Household Survey Data .... . . . . . . . . . . . . . . . . . 74 Resurvey of A Subsample of Rental Units . . . . . . . . . . . . 74 Semistructured Interviews ... . . . . . . . . . . . . . . . . 75 B. Methodological Notes .... . . . . . . . . . . . . . . . . . . 75 Costs and Benefits to Individual Tenants and Landlords .... . . . . . . . . . . . . . . . . . . . . 75 Distributional Issues .... . . . . . . . . . . . . . . . . . 77 C. Analysis of Supply Effects ... . . . . . . . . . . . . . . . . 78 Supply Side Responses to Changes in the Profitability of Rental Investment ... . . . . . . . . . . . . . . . . . 78 Rent Control and Housing Deterioration . . . . . . . . . . . . 78 Rental Housing Losses: Demolitions, Conversions, and Foregone Starts .79 Rent Control and Property Taxes .79 D. Empirical Specification . . . . . . . . . . . . . . . . . . . . . 80 Hedonic Indexes .80 Expenditure Relations . . . . . . . . . . . . . . . . . . . . . 81 Choice of a Reference Group ... . . . . . . . . . . . . . . . 82 Selectivity Bias .... . . . . . . . . . . . . . . . . . . . 82 Other Empirical Problems ... . . . . . . . . . . . . . . . . 84 Possible misspecification of the hedonic index .... . . . . . . . . . . . . . . . . . . . 84 Possible misspecification of the demand relation . . . . . . . . . . . . . . . . . . . . . 85 Length of tenure in hedonic and demand models .... . . . . . . . . . . . . . . . . . . 85 Key money .... . . . . . . . . . . . . . . . . . . . . 87 E. Summary of Estimation Procedures ... . . . . . . . . . . . . . 88 VI. EMPIRICAL RESULTS .... . . . . . . . . . . . . ...... . . . . 90 A. Analysis of Variation in Laws and Market Outcomes By State . . . 90 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . 94 B. Static Costs and Benefits of Controls . . . . . . . . . . . . . . 95 Controlled and "Uncontrolled" Households Compared . . . . . . . 95 Uncontrolled Rents Compared to Results from a Cross Country Model . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Hedonic Regression Results . . . . . . . . . . . . . . . . . . . 97 Demand Equation Results . . . . . . . . . . . . . . . . . . . . 99 Cost Benefit Measures . . . . . . . . . . . . . . . . . . . . . 100 Costs and Benefits for Representative Consumers . . . . . . . . 103 C. Distribution of Benefits and Costs . . . . . . . . . . . . . . . 105 Comparison of Controlled Tenants and Other Tenants . . . . . . . . . . . . . . . . . . . . . . . . . 106 Distribution of Benefits Within the Controlled Sample .106 Comparison of Landlord and Tenant Incomes . . . . . . . . . . . 107  - vi - Page No. D. Evidence on the Effect on Property Taxes . . . . . . . . . . . . 110 Hedonic Regression Results . . . . . . . . . . . . . . . . . . 110 Demand Equation Results . . . . . . . . . . . . . . . . . . . . ill E. Recent Market Trends . . . . . . . . . . . . . . . . . . . . . . 112 Incomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Changes in Rents and Values Since 1974 . . . . . . . . . . . . 113 How Would The Cost Benefit Results Turn Out Today? . . . . . . . . . . . . . . . . . . . . . . . . 114 VII. RENT CONTROL, PROFITABILITY, AND SUPPLY . . . . . . . . . . . . . . . 117 A. Housing SuDRly in Bangalore . . . . . . . . . . . . . . . . . . . 117 New Construction . . . . . . . . . . . . . . . . . . . . . . . 117 Housing From the Existing Stock . . . . . . . . . . . . . . . . 118 B. Rent Control and Landlord Profitability . . . . . . . . . . . . . 118 Present Values ........................ 119 A Present Value Model of Housing Investment in Bangalore . . . . . . . . . . . . . . . . . . . . . . . . 120 Gains and Losses from Four Components and their Interaction . . . . . . . . . . . . . . . . . . . . . . . 124 Rents . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Taxation . . . . . . . . . . . . . . . . . . . . . . . . 125 Maintenance . . . . . . . . . . . . . . . . . . . . . . . 125 Capital Gains . . . . . . . . . . . . . . . . . . . . . . 126 Tenure Security and Value . . . . . . . . . . . . . . . . . . . 126 Effects of Rent Control on Landlord Profitability . . . . . . . 127 Effects on Government . > . . . . . . . . . . . . . . . . . . . 128 Alternative Investment Opportunities . . . . . . . . . . . . . 128 Affordability . . . . . . . . . . . . . . . . . . . . . . . . 129 Consumers' Valuation of the Benefits . . . . . . . . . . . . . 130 Profitability and Affordability for a Smaller Existing Unit Circa 1974 . . . . . . . . . . . . . . . . . . . . . . . 130 Profitability and Affordability Today: Some Initial Conjectures . . . . . . . . . . . . . . . . . . . . . . 130 C. Effects of Other Regulations . . . . . . . . . . . . . . . . . . 134 E. Analysis of Decontrol Policy Options . . . . . . . . . . . . . . 135 Do Nothing . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Blanket Decontrol . . . . . . . . . . . . . . . . . . . . . . . 136 Decontrol New Construction and Upgraded Units . . . . . . . . . 138 Decontrol for New Tenants ......... ... ... ... . 138 Floating Up and Out .................. ... . 138 Other Options ........................ 140 F. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 p1  - vii - Page No). VIII. POLICY IMPLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . 142 A. Answers to the Key Ouestions . . . . . . . . . . . . . . . . . . 142 B. Current Proposals for Reform . . . . . . . . . . . . . . . . . . 149 Immediate Decontrol . . . . . . . . . . . . . . . . . . . . . . 149 Gradual Relaxation . . . . . . . . . . . . . . . . . . . . . . 149 Exempting New Construction . . . . . . . . . . . . . . . . . . 150 Existing Units . . . . . . . . . . . . . . . . . . . . . . . . 150 Recent Specific Proposals . . . . . . . . . . . . . . . . . . . 151 C. A Final Summing Up . . . . . . . . . . . . . . . . . . . . . . . 153 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154   - viii - LIST OF TABLES Page No. 2.1: Urban Legislation and Housing Market ... . . . . . . . . . . . . . 25 2.2: Selected Features of Rent Control Acts by State/Territory . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.3: Housing Situation in Selected States . . . . . . . . . . . . . . . . 35 3.1: Summary Descriptive Statistics, Bangalore, 1974 . . . . . . . . . . . 40 3.2: Distribution of Tenure, and Rent Burdens, by Income Decile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.3: Distribution of Controlled Units, by Income Quartile . . . . . . . . 42 3.4: Order of Priority in Allotment of Residential Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5.1 Summary of Estimation Procedures and Key Calculations . . . . . . . . 89 6.1: Urban Housing Market Indicators, By State . . . . . . . . . . . . . . 91 6.2: Statewise Indices of Rent Regulation . . . . . . . . . . . . . . . . 93 6.3: Controlled and Uncontrolled Samples Compared . . . . . . . . . . . . 96 6.4: Hedonic Index for "Uncontrolled" Renters . . . . . . . . . . . . . . . 98 6.5: Demand Equations for "Uncontrolled" Renters . . . . . . . . . . . . . 99 6.6: Cost-Benefit Measures from Survey Demand and Hedonic Models . . . . . 101 6.7: Summary Cost-Benefit Measures By Income . . . . . . . . . . . . . . . 106 6.8: Comparison of Landlord and Tenant Incomes . . . . . . . . . . . . . . 109 6.9: Comparison of Landlord Tenant Incomes Landlord Incomes Weighted by Income From Property . . . . . . . . . 110 6.10: Hedonic Index for Strictly Controlled Renters . . . . . . . . . . . . 110 6.11: Demand Equations for Controlled Renters . . . . . . . . . . . . . . . 111 7.1: Cash Flow Model of Rental Investment . . . . . . . . . . . . . . . . 121 7.2: Demand Side of Rental Investment Model . . . . . . . . . . . . . . . 122 7.3: Key Model Inputs . . . . . . . . . . . . . . . . . . . . . . . . . . 124 7.4: Rates of Return to Middle Class Unit, Under Alternative Policy Regimes . . . . . . . . . . . . . . . . . . . . 133  - ix - LIST OF FIGURES Page No. 2.1: How Housing Markets Work . . . . . . . . . . . . . . . . . . . . . . 11 2.2: Urbanization and GNP Per Capita . . . . . . . . . . . . . . . . . . 13 2.3: India's Rural and Urban Population . . . . . . . . . . . . . . . . . 13 2.4: Cross Country Model of LDC Rental Housing Demand . . . . . . . . . . 14 2.5: Rental Demand in Cairo, Egypt . . . . . . . . . . . . . . . . . . . 15 2.6: Housing Investment and GDP; India Compared to Other Countries .... . . . . . . . . . . . . . . . . . . . . . . . . 16 2.7: Housing Investment to GDP . . . . . . . . . . . . . . . . . . . . . 16 2.8: Housing Investment and Gross Fixed Capital Formation . . . . . . . . 16 2.9: India's Urban Housing Stock, 1961 and 1985 . . . . . . . . . . . . . 17 2.10: Urban Tenure, Recent Census Years . . . . . . . . . . . . . . . . . 17 2.11: Formal and Informal Housing Finance, Selected Years . . . . . . . . 21 2.12: Formal Housing Finance by Institution, Selected Years . . . . . . . 21 2.13: Interest Rates from Selected Housing Finance Institutions, Mid 1980s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.14: Growth and Price Distortions . . . . . . . . . . . . . . . . . . . . 24 2.15: Housing Price to Income and Housing Finance . . . . . . . . . . . . 26 2.16: House Price to Income and Interest Rate Policy . . . . . . . . . . . 26 2.17: House Price to Income and General Distortions . . . . . . . . . . . 26 3.1: Bangalore's Population, Selected Years . . . . . . . . . . . . . . . 36 3.2: Housing Tenure in Bangalore (1974) . . . . . . . . . . . . . . . . . 37 3.3: Units by Controlled Status (1974) . . . . . . . . . . . . . . . . . 37 3.4: Housing Consumption and Quality, Bangalore . . . . . . . . . . . . . 38 3.5: Presence of Housing Services . . . . . . . . . . . . . . . . . . . . 38 3.6: Housing Tenure and Income . . . . . . . . . . . . . . . . . . . . . 42 3.7: Rent to Income by Income, All Bangalore Renters . . . . . . . . . . 42 4.1: Rent Control as Effective Price Control . . . . . . . . . . . . . . 52 4.2: Rent Control as Expenditure Control . . . . . . . . . . . . . . . . 53 4.3: Rent Control and Consumer's Surplus . . . . . . . . . . . . . . . . 54 4.4: Stylized Decomposition of Rental Housing Stock . . . . . . . . . . . 62 4.5: Alternative Decontrol Options, Los Angeles . . . . . . . . . . . . . 71 5.1: Static Costs and Benefits of Effective Controls . . . . . . . . . . 76 5.2: Effect of Selectivity Bias . . . . . . . . . . . . . . . . . . . . . 82 5.3: Rents and Length of Tenure Under Bangalore's System of Controls . . 86  -'x- Page No. 6.1: Growth in Rental Housing and Regulation of New Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 6.2: Growth in Rental Housing and Rent Regulation . . . . . . . . . . . . 93 6.3: Vacancy Rates and Regulation of New Construction . . . . . . . . . . 94 6.4: Vacancy Rates and Rent Regulation . . . . . . . . . . . . . . . . . 94 6.5: Cost Benefit Measures by Type of Control . . . . . . . . . . . . . . 102 6.6: Consumers' Surplus for Typical Ordinary Controlled Tenant . . . . . . . . . . . . . . . . . . . . 104 6.7: Consumers' Surplus for Typical Strictly Controlled Tenant . . . . . . . . . . . . . . . . . . . . 104 6.8: Renter Income Distributions Compared . . . . . . . . . . . . . . . . 106 6.9: Landlord and Tenant Incomes Compared .... . ...... . . . . . 107 6.10: Cost-Benefit of Typical Ordinary Controlled Household, Over Time 115 6.11: Cost-Benefit of Typical Strictly Controlled Household Over Time 115 7.1: New Starts in Bangalore .... . . . . ...... . . . . . . . . 117 7.2: Bangalore: Census Population and Census Houses .. . .... . . . . 117 7.3: Change in Components of Landlord's Present Value . . . . . . . . . . 125 7.4: Summary Present Value Strictly Controlled Unit . . . . . . . . . . . 127 7.5: Internal Rate of Return: New Unit .... . . ..... . . . . . . 127 7.6: Losses to Three Actors . . . . . . . . . . . . . . . . . . . . . . . 128 7.7: Willingness to Pay Decontrolled (Year 1) . . . . . . . . . . . . . . 129 7.8: Affordability Over Time . . . . . . . . . . . . . . . . . . . . . . 129 7.9: Consumer's Surplus One More Time . . . . . . . . . . . . . . . . . . 131 7.10: Summary of Second Case: Ordinary Controlled Unit . . . . . . . . . . 132 7.11: Time Path of Rents, I . . . . . . . . . . . . . . . . . . . . . . . 140 7.12: Time Path of Rents, II . . . . . . . . . . . . . . . . . . . . . . . 140 7.13: Time Path of Rents, III . . . . . . . . . . . . . . . . . . . . . . 140   COSTS AND BENEFITS OF RESIDENTIAL RENT CONTROL IN BANGALORE, INDIA I. INTRODUCTION 1.1 Rent control is more common in developing countries than is commonly perceived. For example, in India rent controls have been in place in most major cities since the 1940s. In Bombay, rent control acts were enacted as early as 1918. However, the specific design of controls, their enforcement, and market conditions vary considerably from place to place within India; and of course they vary even more from country to country. This paper is a case study which presents empirical estimates of the costs and benefits of rent controls in one city, Bangalore, India. While there is a growing literature on Indian housing markets and rent control in particular, which we draw on freely below, so far to our knowledge no study has estimated the effects of controls with the rigor which we attempt here. 1.2 The paper is of particular interest to those concerned with the effects of rent controls in India, but it is also part of a larger comparative research project on "Rent Controls in Developing Countries" (RPO 674-01) which will compare the effects of different rent control regimes under different market conditions from a number of countries. That research has already demonstrated that rent controls differ markedly in their effects depending on specific provisions and enforcement provisions, and market conditions. Even within India, these vary from market to market, as will be described below. A. Objectives of the Study 1.3 The objectives of the paper are to describe rent control laws and related regulations, in the various states but in Bangalore in some detail; to describe market conditions, and constraints on the market, again generally and in detail for Bangalore; to analyze the costs and benefits of controls; and to analyze options for relaxation or decontrol. No less important is to highlight where additional research would shed light on these issues; in particular, we hope the present paper will motivate additional data collection and analysis from a number of Indian markets. 1.4 While this paper is a study of one market, it will indicate which STUDY OBJECTIVES findings are likely to be robust and generalizable across markets, and Describe Rent Control Laws and Related Regulations which findings are likely to be peculiar to the type of regime Describe Market Conditions and Housing Market studied. In addition to presenting Constraints (Land, Finance. e.) result for a large market at a Analyz. Costs and Benefits of RC in Bangalore particular time and attempting to Analyze Current ProfLtabilLty and Affordability, and indicate which results are Options for Relaxation and Decontrol generalizable to other times and Motivate Additional Data Collection and Analysis  places and which are not, this paper aims to serve as a model for future empirical research on controls in India. Forthcoming papers about other countries from the research project will synthesize results from a number of case studies, providing other comparative information. Key Ouestions 1.5 More specifically, after describing the market and controls in India and in Bangalore we seek to illuminate the following questions: (a) What are controls like in urban India? What variation exists in laws, enforcement, and effects, among the various states and among cities? What related regulations exist? (b) What are the static costs and benefits of controls from the point of view of tenants and landlords? How do changes in rents and housing consumption affect the welfare of typical individuals? (c) What are the distributional implications of controls? (d) What are the dynamic costs? Are there measurable losses to tenants from reduced mobility and to landlords from inability to convert units to their highest and best use? What are the losses to society from foregone investment and inefficient use of the existing stock? (e) What are the effects of controls on government revenue, including property and income taxes? (f) What are the effects of rent control on the profitability of rental housing? What are the implications for housing supply? (g) How, on balance, do landlords and tenants adjust to controls? (h) Many alternatives for change present themselves. What can we infer about the effects of different changes on profitability and supply? On affordability and on the distribution of income and welfare? What other constraints must be addressed for the housing market to respond to changes with increased output rather than increased prices? (i) The comparative static cost benefit analysis carried out for this study use data from 1974. Can we make some conjectures about what the cost-benefit results might look like today, at least qualitatively? (j) What additional work is required to analyze controls? 1.6 The body of the paper consists of a blend of review of existing literature, new empirical work, theoretical analysis and simulation which will  answer these and other questions par! passu. For those who can't wait, we summarize some of the results here. B. Executive Summary Rent Controls in India 1.7 Details of rent controls, their enforcement, and related regulations are largely in the purview of the states. A number of states have adopted exemptions for new construction for a period of 5 or 10 years (Andra Pradesh, Goa, Haryana, Karnataka, Madyha Pradesh, Orissa, Tamil Nadu and Uttar Pradesh), and there is some variation in how fair rents are set and other details of regulation. Perhaps the most important regulation related directly to rental housing is tenure security. Other important regulations include the Urban Land (Ceiling and Registration) Act and the Town Planning Act. Initial empirical analysis of statewise differences in rent control provisions could not uncover any correlation between housing market outcomes and the limited statewise variation in Indian rental regulations. 1.8 An important feature of controls is that Bangalore (and other large cities) have different classes of controls depending inter alia on characteristics of the unit and the household. In Bangalore, units which are newly constructed or below a ceiling are "uncontrolled." Units which have been allotted by the Rent Controller to government servants or other priority households, or which have otherwise had "fair rents" formally set are "strictly controlled." Other rental units are "ordinary controlled." Data and Method 1.9 The paper aims to blend theory and empirical work to describe outcomes qualitatively and, where possible, quantitatively. Key data sources include a large household survey of 1745 Bangalore households carried out in 1974; a resurvey of some 211 of those households; and more recent semistructured interviews from 40 non-randomly selected households. These are complemented by aggregate data from official sources, including the Census of India, National Building Organization, and India's national income accounts; and interviews with Rent Controllers and others knowledgeable about the market. We also make free use of results from a number of Indian scholars who have previously studied controls and Indian housing markets. 1.10 Simple theoretical models are used to analyze controls, including the familiar analysis of rent control as a tax on housing capital, and some extensions; and models which analyze deterioration, duration of tenancy, and pricing with restricted entry. We analyze statewise differences in controls and housing market outcomes using simple analysis of variance techniques. We use the 1974 data and its extensions to carry out a straightforward static cost benefit of controls. Finally, we build a present value model, augmented with a demand side, which can be used to study the effects of controls on landlord profitability and tenant affordability more dynamically.  -4- Bangalore's Housing Market 1.11 Bangalore's housing market is primarily a rental market. Sixty three percent of the households from the 1974 sample rented their dwelling unit. 1.12 The breakdown of controlled units into strictly controlled and other controlled is based on a 1984 resurvey of part of the original sample. While a resurvey sample frame was chosen to be representative, respondents are not necessarily representative of the original sample and original population. They appear to have slightly higher incomes, and are more likely to be renters than the total 1974 population. Rent Control In Bangalore 1.13 Provisions regarding allotment of buildings and fixation of fair rent do not apply to buildings constructed after August 1, 1957 for a period of five years from the date of construction of such buildings. Units which rent for 15 Rupees or less are also exempted from these provisions. 1.14 According to the Act, whenever a house which is more than five years old becomes vacant, the landlord must inform the Rent Controller of the vacancy within 15 days. The Controller then starts the process of allotting the house to the tenant, according to the Rent Control Rules. In general, to be considered for allotment an applicant must be a resident of Bangalore, and cannot own another house within the city. The latter provision only came into force in 1976, however, and is not necessarily enforced. Strict guidelines exist for determining priority in the queue for allotment (see Table 5). Priority is determined mainly by employment. Elected officials and government servants generally have the highest priority for allotment. 1.15 Rental housing under control of the act can, therefore, be considered as subdivided into (i) ordinary controlled housing, and (ii) housing which has its "fair rent" set by the rent Controller, and/or which is allotted to specific tenants by the Rent Controller. The latter is in most senses a stricter form of control. Rents for ordinary controlled housing are frozen in theory, and go up slowly if at all in practice. But if the unit has been allotted by the rent controller, as described below, rents may be rolled back below their current level. Also, an unallotted tenant may apply to the Rent Controller for fair rent fixation, which may again be below the current controlled rent. As detailed below, it appears that a significant proportion of renters choose not to apply for fair rent fixation, but that the possibility of tenants applying is an incentive for landlords not to raise rents illegally on "normal" controlled units. For the rest of this paper we will adopt the following convention. Controlled units are those whose rents are frozen, but those rents are not "fair rents" set by the rent controller. Strictly controlled units are those whose tenants have been allotted by the rent controller, and/or whose rents are set by the Rent Controller. (When the context is clear we will refer to both groups as controlled). Uncontrolled units are units which rent for less than 15 Rs. per month, or rental units which are less than five years old.  -5- Costs and Benefits of Controls 1.16 Costs and benefits differ significantly between "strictly controlled" and 'ordinary controlled" units. Normalizing the market price per unit of housing services at one, we estimate that the typical "ordinary controlled" household would consume 133 units of housing services in the absence of controls and other market imperfections. In fact we observe households consuming 65 units, but spending only 60 (i.e. the price per unit of housing services is 60/65 - 0.92 of the market price). Depending on assumptions about the price elasticity of demand curve we use, we estimate they would like to consume around 150 units of housing services at controlled prices. But they are constrained by a shortage of appropriate units at the lower price, and they end up consuming less, i.e. 65 units for 60. They benefit from the lower rent (a 5 Rs. per month subsidy from landlords) but they also lose from consuming less housing than they would consume in the absence of controls. According to our estimates, the loss is greater than the gain from lower rent, and the tenant is worse off than he or she would be in equilibrium at market prices. The loss is greater the lower the price elasticity in absolute value. 1.17 Strictly controlled renters are in a quite different situation, according to the "representative" calculations. For the typical strictly controlled household, we estimate that 97 units of housing services would be demanded in the absence of controls and other market imperfections. The typical household actually consumes 107 units, actually a little more than demand at market prices, but spends only 45 (i.e. the price per unit of housing services is about 0.42 of the market price). In other words, strictly controlled households are (compared to "ordinary" controlled) receiving a bigger transfer from a lower price and are closer to their demand curve. These favored households are better off under controls, because they receive a bigger transfer and they also value the transfer at close to its cost to landlords. 1.18 The bottom line is that rent control reduces the rents households pay, but for the typical "ordinary" controlled household the benefit of this rent reduction is small and is more than offset by the welfare loss from underconsumption of housing. Households under "strict" controls benefit substantially at the expense of landlords. However, gains and losses to "average" households can mask large differences in the outcomes to individual tenants in either group. 1.19 Rent controls which are not indexed to inflation (as Bangalore's is not indexed) become more binding over time. Consider an "ordinary controlled" household which in 1974 had the typical values of income, PcQc, PmQc, and PmQm for its category (Figure 4.3). Starting from a typical rent of about 60 Rs., such a unit would rent for about 160 Rs., had rents increased in line with general price changes. Had rental demand increased with changes in prices (abstracting for the moment from real income growth), demand for those typical "ordinary" controlled households would be about 320 Rs. So over time, with controlled rents largely fixed, the subsidy to these units has been increasing. This suggests that any period's static estimate is an underestimate of the stock value of controls to a sitting tenant. The annual subsidy rises over time from 31 to about 89, and presumably it is still rising.  - 6 - 1.20 For strictly controlled units, typical estimated market rents would rise from about 45 Rs. to about 260 Rs. Households would demand about 210 Rs. Again subsidies would approximate benefits. 1.21 These results are not surprising, but illustrate straightforwardly how controls become "more binding" over time, exacting higher costs of landlords, and conferring larger benefits on tenants. Note that for the "ordinary" controlled tenant, eventually the benefit of the subsidy outweighs the cost of disequilibrium in consumption, and in both cases costs and benefits increase monotonically with time. Distributional Effects 1.22 There are three distributional considerations: (i) How do controlled renters compare to uncontrolled households? (ii) Within the group of controlled renters, who gets the largest benefits? (iii) How do renters compare as a class to landlords? 1.23 ordinary controlled renters are higher income than uncontrolled renters, and strictly controlled renters are lower income; but there is a great deal of overlap in their distributions. Controlled renters are more or less like other renters and like the general population; they are not, as a class, greatly more or less disadvantaged. Rent control is not an efficient redistributive device on this account. 1.24 There is no discernible relationship between income and benefits within the controlled samples. We disaggregated by strict versus loose controls, and estimates simple multivariate models, with the same result: within the sample of controlled households, benefits are largely unrelated to income, household size, or length of tenure. 1.25 Finally, if landlords have higher incomes than tenants who are not landlords, on average; median incomes for the landlord groups are some 70 percent higher than non-landlord tenants. But the following results are also obtained: (i) Almost one quarter of the landlords have incomes below the median (non-landlord) renter income; almost one quarter of the non-landlord renters have incomes greater than the median landlord income. (ii) More than 10 percent of renters (110 out of 1045) are also landlords; and as a class, they are as rich as homeowning landlords. (iii) Most landlords hold relatively few units; the ratio of occupied rental units to number of landlords is about 4. 1.26 Thus it does not appear that rent control does very much redistribution of income from rich to poor, and almost certainly does some redistribution in the wrong direction. Of course richer tenants own more units. Income distribution figures were roughly weighted by income from property, for comparison. About half of landlords own one or two units; examining the distribution of rental  income and using the rough rule of thumb of 50 Rs. per unit suggest that around two thirds own three or fewer. Less than 3 percent of landlords receive more than 1000 rupees per month from their property. When the data are so weighted, the income disparities between landlords and tenants who don't own other property are accentuated, but there is still overlap and the fact that renters who themselves own property are actually the richer class remains unaltered. Effect on Tax Revenue 1.27 Demand in the strictly controlled sector is related to household size, length of tenure and education, but is unrelated to income, the direct measure of ability to pay taxes, and to fair rent (the basis of taxes). In effect, we cannot reject the hypothesis that there is no systematic relationship between fair rents and income, and the point estimate is perverse: richer households would pay lower taxes. If the standard of comparison is income, taxation based on fair rents is essentially random. 1.28 Median fair rents are about 42 percent of median estimated market rents. If Bangalore's market had been in equilibrium at our estimate of long run market prices, (i) property tax collections would have been about 2.4 times their actual collection, assuming no change in mill rates or improvements in collection procedures and (ii) the incidence of the tax would be more equitable, if we adopt the standard that ability to pay is related to characteristics of the unit and/or income of the household. Effects on Profitability and Supply 1.29 Unfortunately, little data on supply and its components are available over time. Hardly any information is disaggregated by sector or tenure. Analysis of the growth in households, permits, and completions from the time of the household survey to the 1980s showed that in the mid 1970s there were roughly four new households for every new housing permit; at the end of the decade the ratio had deteriorated to about five. 1.30 Taking a longer view with census data presented a different picture. While population grew by about 3.3 percent per annum during the 1960s and 6 percent per annum during the 1970s, the number of census houses grew by 6.8 percent and 6.3 percent in each of the two decades. The ratio of persons per census house declined from 8.4 in 1960 to 6.3 in 1980. But comparing growth rates in the two decades it does appear that population growth has picked up while growth census houses tailed off. 1.31 Starts and completions data only count formally registered dwellings, and thus undercount actual changes in supply. Census house data include data for shops and certain structures which may be only partly used as dwellings or not currently used as dwellings at all. None of these data sources tell us much about the intensity with which the stock is used. The data are not disaggregated by tenure. And little insight is given into the supply of rental and other housing from the existing stock, which in any given year is the vast majority of supply.  - 8 - 1.32 Rent control creates an incentive for landlords to allow existing properties to deteriorate. Many renters live in housing which, structurally, has been allowed to fall into disrepair. Strictly controlled rents are often insufficient to cover maintenance costs. The hedonic models show that, while these units would rent for more than the controlled price in the open market, their price is still low and sometimes less than what tenants would be willing to pay for a better unit. Good data are lacking on maintenance behavior in Indian cities. However, anecdotal evidence indicates that at least some renters spend their own resources on maintaining and improving their rooms, probably encouraged by their perceived security of tenure. 1.33 Several representative investment cases were studied and a model built which will permit additional simulations in future work; but for one central case the internal rate of return for a controlled unit was estimated at -10 percent. In other words, landlords under controls lose about 10 percent per year, "on average." Without controls, such rental housing units could compete for capital with investments yielding real returns of up to 3 or 4 percent. Controls reduce the rate of profit by about 14 percent overall. Perhaps surprisingly, tenure security depressed returns as much or more than controls themselves. 1.34 Rates of return based on the 1974 prices and current rates of return are qualitatively similar. Other analysis showed that even deep land subsidies don't make such an investment profitable in the presence of rent control and tenure security regulation. Reform Alternatives 1.35 Alternatives for reform exist. Blanket lifting, permanent decontrol of new construction, decontrol for units which do not meet certain standards, either now or after upgrading, vacancy decontrol, vacancy rate decontrol, rent level or market segment decontrol, contracting out, and floating up and out are among the options discussed. While there is certainly room for discussion of other alternatives, results presented above suggest decontrolling new construction, indexing rents for existing units to general prices, and letting real rents for existing units rise gradually. 1.36 The most effective method for encouraging new investment while protecting low income renters may involve a combination of indexation of increases with a "floating up and out" of controls. The latter involves the transition from controlled rents to market rents over a period of years. It is preferable to have an end date when controls are withdrawn completely in order to maintain landlord confidence in the reality of the end of the controls which have cost them so much. Indexation could provide a formula for determining the intermediate rent levels. For example, rents could be increased annually by, say, the Consumer Price Index plus a percentage of the previous year's rent until a set date when the final increase to market levels would be implemented. Any units reaching their market level before this date would, of course, remain there. This phasing would smooth the path of adjustment giving tenants who could not afford their current room at the market rent time to find suitable alternatives.  1.37 Since the ordinary controlled sector is already close to what it might be in the absence of controls (at least for the typical unit), phasing in makes less difference there than in the strictly controlled submarket. 1.38 Once again, it cannot be overemphasized that whatever option is chosen, actions must be taken to ensure elasticity of housing supply so that increases in rents are accompanied by an increase in production. This requires that rent control is seen as one part of a housing strategy which also aims to release resources on the supply side (land, infrastructure, materials, and finance) so that supply and demand can reach equilibrium through increases in both the scale and the variety of the housing stock rather than through greatly increased prices. 1.39 Rental housing suffers from the same problems as the market overall-- problems in the key input markets of land, finance, infrastructure and materials, and problems in the regulatory framework. Many such problems, when addressed, are not tenure specific but will aid rental as well as owner occupied housing-- for example, changes in the Urban Land Ceiling Act, and improvements in land titling, or in infrastructure provision. But other problems affect rental disproportionately. Building codes and land use regulations which discourage compound houses particularly affect rental housing. Rent controls and other rental regulation obviously discriminate against this form of housing supply. Less obviously, solutions to market wide problems--such as land and finance--need to be designed with both rental and owner occupied housing in mind. Relaxation/reform must be accompanied by measures to ensure a rapid supply response to the demand for rental housing, or else rapidly rising rents could squeeze existing tenants and jeopardize reform. Political consensus is, after all, required for successful change. 1.40 Of the major constraints on private rental housing, many--land, finance, infrastructure, materials, building codes and standards--were discussed briefly in Chapter 2. While detailed discussion of each is beyond the scope of this report, the following points should be noted. Rental markets suffer from the same constraints as housing markets generally, but there are also some which affect rental particularly (in addition to the obvious problem of rent controls). Among other collateral actions, it will be necessary to review regulations affecting the supply of urban land, including the Urban Land Ceiling and Registration Act, to pay particular attention to building codes, land use standards, and other regulations which discriminate against low-cost housing. 1.41 Rental should not be discriminated against. Do not require owner occupancy for access to land in any program designed to improve land availability (including sites and services). Finance for rental housing also needs to be considered. Ensure that rules for lending don't discriminate (intentionally or unintentionally) against rental housing. These and other actions need to be taken as complements to any reform program.  - 10 - Suggestions for Future Work 1.42 This paper examines the costs and benefits of rent control for an important market in India. The paper is, to our knowledge, the first rigorous empirical study of its kind in any Indian market. As will be explained later in the paper, additional work on controls in other cities and on collateral issues such as land and finance will be very useful in analyzing specific policies and reforms. Also, some of the survey data we use is from a decade and a half ago. There are no shortcomings with such an approach if the paper is viewed as a research study of rent control in a particular time and place. But we would like to generalize where possible about other Indian cities and the current environment. We will therefore indicate which specific results would probably change if estimated with today's data, and how we think they would change. Improved data collection, including well designed housing surveys in several markets, can make all these tasks easier. 1.43 In addition to more up to date static cost-benefit analysis, there could be much more work on the dynamics of supply in general. More detailed analysis of other constraints on land and housing markets, and comparisons to rental regulation could be carried out. Models which predict the time path of rents, rather than merely explore the qualitative implications of assumed time paths, would be difficult to calibrate precisely but could be constructed. 1.44 Finally, we hope the shortcomings of the paper motivate researchers and policy analysts to take on more such empirical work. Improving the coverage and bifurcation of aggregate data can improve analysis of supply side issues, and carrying out and analyzing new household surveys can have large payoffs in understanding Indian housing markets.  II. HOUSING MARKETS AND RENT CONTROL, IN DEVELOPING COUNTRIES AND IN INDIA A. Proloaue: Housing Markets in DeveloRing Countries 2.1 Housing investment is the largest single form of fixed capital investment in most economies, developing or developed. In developing countries, the shelter sector usually ranges from 10 to 30 percent of household expenditure, or 6 to 20 percent of GNP. Housing investment typically comprises from 10 to 50 percent of gross fixed capital formation. Further, housing investment's share of GDP rises as economies develop. Other than human capital, housing and land are the commodities with the widest ownership. For example, historical research into Britain's industrial revolution has pointed out that investment in housing and its associated infrastructure was much larger than investment in plant and equipment. A Framework for Analysis: How Housing Markets Work 2.2 Clearly some housing problems stem directly from poverty. Improving housing conditions which are bad solely because incomes are low must be accomplished by improving the productivity and incomes of the poor. But many countries which are succeeding in the task of general development find housing conditions lagging. Many countries at all levels of development find housing conditions worse than they need be because their housing markets are not functioning efficiently. 2.3 Figure 2.1 shows a schematic diagram of how the housing market works. Inputs such as land, labor, finance, materials, and infrastructure are combined by supply-side agents such as landlords and developers to produce housing services. Homeowners, and to a lesser extent, renters, are also producers, if they maintain and upgrade their houses. Relative prices inform producers of housing services about whether to provide more or less housing. FIgure 2.1: : How Housing Markets Work 2.4 The market for housing services per How Housing Markets Work se can be well approximated as a competitive market. For the activities in the middle box, Inputs Production Demand there are few barriers to entry or large p p Land a- economies of scale in most countries. This Zk I I Da eI does not mean, of course, that anybody in a %as to C C Hom.o , poor country can become a landlord or , . oeXX putonl developer. But there are seldom so few landlords or developers that they exert significant market power, unless they also control inputs that are not competitive, or their numbers are limited--intentionally or not--by regulation.,  - 12 - 2.5 The market for many inputs is not competitive, however: (i) their ownership may be so concentrated that owners can fix prices, as in some land markets; (ii) large economies of scale may make the production of some inputs a natural monopoly, as with some types of infrastructure; and (iii) government regulations may restrict the competitive allocation of inputs, notably finance and serviced land. 2.6 The implications of this analysis are clear. Problems in housing markets are often caused by problems in the input markets. Government actions that attack these problems directly are the right ones. Rather than adopt this approach, however, many governments intervene in production (the middle box). Governments that try to fix prices--for example, by rent controls--distort the signals being sent to the market and may exacerbate the original problem. Rent controls attack the symptom, not the problem. 2.7 In line with the conceptual framework above, the evidence we present below supports this notion that rent controls, and other price controls, attack symptoms rather than problems in housing markets. Those problems are, first, the low incomes of many Indian citizens, because their productivity is impaired; and problems in many of the key input markets. Then rent controls can be seen as interfering with signals and, paradoxically, postponing dealing with the real problems in housing markets. 2.8 Regarding the first, and perhaps preeminent problem--improving the productivity and incomes of the poor--is too large a topic to treat here.11 While there are interrelationships between housing and productivity, we do not discuss those either. We focus more narrowly on the performance of the housing market, taking incomes as given. Few observers of the Indian scene would quarrel with the notion that housing conditions are even worse than they need be given low incomes. First we will set the stage with a brief comment on the scale of urbanization in India. Then in the next few pages we will briefly discuss demand, supply, the regulatory framework, and each of the key input markets in turn. B. Overview of India's Urban Housing Markets Recent Trends 2.9 The Government of India's (1988) recent Report of the National Commission on Urbanization put the link between urbanization and the housing market quite starkly: Because of the magnitude [of urbanization] our attitude to these urban centers has been confused and equivocal. On the one hand we see them as heroic engines of growth, not only creating skills and wealth for the nation, but also generating employment for migrants from rural areas.... On the other hand, these urban centres have also generated the most brutal and inhuman living conditions, with large sections of the citizens (almost half in Bombay and Delhi) living in squatter settlements. (Vol.1, p.1) 1/ See, among other references, Kahnert (1987).  - 13 - 2.10 Despite recent increases in the share of GNP devoted to housing investment, many problems remain; housing and, especially, land prices are shooting up in Indian cities; the number of squatters continue to increase; and the fact is that generally housing conditions are getting worse instead of better, for a large proportion of the urban population. Figure 2.2: : Urbanization and GNP Per Capita PLgure 2.3: : Indias Rural and Urban Population GNP Pot Capita o l Population IMXewul )t Urba .. .. . .. ...,,.,.. - - - .. .. ..,. . . . . . . . . . . . . . . . . . . ........Rb& -''''''''''''''''''--'------,-............ ....... .. ... . ................ - -,,,;,,, ......1 gg o lo~~~~~~~~~................. . :::::::::::::::'::::- ::::*o_ ......... e.bs|......... -40. ........ ... 20j 1,000 .. ....................... ....... ..e.o .. - . . . -. . . . .. ... ...... ................. .............................. l.ee