Fix the issues that plague the Indian housing market
Liberalising Floor Space Index caps will make homes accessible. Supplement it with additional infrastructure
Arecent cover story in The Economist focused on what it termed as the “horrible housing blunder”. It outlined how an obsession with home ownership in the West has driven up home prices, and undermined growth. It rightly placed the blame on supply side constraints, and on underlying political economy issues. Similar issues plague the Indian housing market, and are tied to the questions plaguing Indian 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 labour markets, where high productivity jobs are created due to economies of scale, scope and agglomeration. Urban agglomerations provide easy access to markets and jobs, lowering search costs, offering reasonable commute times, and enabling exchange of ideas, all of which fuel productivity growth and innovation. This simple fact is unappreciated by the Indian political establishment. Instead, an inordinate amount of time has been spent trying to keep people out of cities.
To do so, several tools are deployed by Indian planners, the most egregious of which are restrictions on floor space. The Floor Space Index (FSI) prescribes the ratio of floor space that can be built on a plot of land. For instance, an FSI of 1.33 on a 100 square metre plot allows a builder to build 133 square metres of floor space, as single or multiple floors. Where land costs are high, or land supply limited, higher FSI reduces the cost of land per unit. Most successful cities have done exactly this. Singapore, for instance, allows an FSI of 25 in the business district.
The instinct to cap FSI is premised on two conceptual fallacies. The first is that policymakers can limit the number of people in an area by limiting the amount of floor space. The second is that FSI must be tied to existing infrastructure availability. On both fronts, reality proves otherwise. As productive cities such as Mumbai and Bangalore created jobs, people were willing to cram into less space to access work opportunities. Since the formal real estate market was stifled by FSI restrictions, slums proliferated. Prices skyrocketed, and space per person fell. Infrastructure — drainage and roads — crumbled under the strain of higher occupancy. This reinforces fears about density, justifying continued caps.
FSI restrictions conflate the density of people with density of physical space. Density of people is determined by the desirability of a location. The density of space is the amount that can be built in an area. The former cannot be controlled in a democracy, while the latter is a matter of regulation. To illustrate, for the worst fears around density to be realised, doubling FSI should be accompanied by a doubling of population. For example, doubling Mumbai’s FSI to 2.6, will only make things worse if the population doubles to 40 million, or it just increases space per person.
Moreover, city building is a dynamic process. Whether Hong Kong or New York, cities have increased the carrying capacity of their infrastructure as the population grows.
FSI restrictions create other market distortions. Height caps encourage sprawl, necessitating more kilometres of roads, pipelines and increasing the carbon footprint. Restrictions reinforce existing inequalities. Given low FSI, the only way to build a 80-100 storey building in a city like Mumbai is to acquire large land parcels. Residents of these buildings have a high quality of life within the walled garden, which drops the minute they exit the building.
Much needs to be done. Cities must take the politically difficult decision to liberalise FSI. The common misconception is that increasing FSI is a sop to developers. Indeed, developers would like increased FSI, but for themselves, not the entire city. The latter will increase supply, benefiting buyers and renters. Cities like Hyderabad, with unlimited or high FSI, are not teeming with skyscrapers. Building tall, expensive towers is justified only if the underlying land is expensive, with the caveat that the high land costs may simply be a consequence of restricted supply.
Cities must support increased FSI with investments in transport, particularly transit-oriented development, which uses transportation investments to open up new areas for construction. To obtain land for transport and public space, Ahmedabad has notified local areas plans that require builders to surrender some part of their land in lieu of more vertical floor space. Builders compensate for the land in height and the city gains land in the public domain for sidewalks and transport. In addition, reliable public transport increases the labour catchment area.
The housing blunders of the West offer a cautionary tale. Today, housing markets reward incumbents, while a young and aspirational generation struggles to afford housing and a toehold in cities. This will eventually translate into discontent, and an erosion of productivity and wealth that the country can ill afford.
Reuben Abraham is CEO and senior fellow, and Pritika Hingorani is director and research fellow, IDFC Institute
The views expressed are personal