Housing Polices are reluctant to impose obligations while doling out financial and FSI incentives. Thus, they are ineffective when it comes to increasing the supply of middle and low income group housing. Should this continue?

Shouldn’t the government step in to regulate the prices of houses to make them affordable to middle and low-income groups? Just as it controls the prices of essential commodities, can’t it cap the prices of apartments?

When I posed these questions to a senior government official connected with urban development, he rejected the idea – it was ‘impractical,’ he said. He knew that the cost of housing is spiralling endlessly upwards and that the ratio of incomes to prices is bewilderingly high, and many are turning house-poor. But he still ruled out any price control.

Direct government regulation of house prices is not a new idea. China, faced with steep increases and widening housing inequality, directed its local governments to cap apartment prices and control the ‘runaway price hike’. To reduce speculative buying, it asked banks to increase down payments and increase home loan rates for those who were buying second homes. A ban on purchasing third homes was also suggested.

Chennai policy-makers, however, reason that incentives such as relaxing FSI rules (the buildability ratio) to allow developers to construct more than what is permissible, will improve the supply of affordable housing and thus reduce prices. In other words, there is no need for controls and conditions – carrots will work.

What the government official failed to acknowledge was that similar incentives and policies announced earlier have had no impact so far. Last year, when the government increased the FSI for lower-income group housing, there were no takers. The Delhi Declaration, a resolution framed in the recently concluded International Conference on Inclusive Urban Planning organised by the Ministry of Housing and Urban Poverty Alleviation and other key players such as World Bank and United Nations Development Programme, concluded that `Market–driven responses in respect of urban lands’ does not work .

It clearly stated that `the notion that an increase in the demand for urban land for the poor will spur its supply, has turned out to be flawed.’

Similiarly, various interest subsidy schemes have not benefited many, because there is a dearth of cheap houses. On the contrary, financial incentives such as income tax deduction and lower interest rates for home loans have spurred the housing market for the privileged sector.

High income-earners have taken advantage of them to buy second and third homes, many of which are lying vacant. Census figures reveal that 9.43 million houses are lying unused in the country. Despite the current form of incentives failing, the government sees no need to rethink its approach. The Tamil Nadu government has now proposed to extend the higher FSI scheme for middle-income group housing units – flats that are around 700 sq.ft. The same reasoning still continues: more incentives will lead to more supply and more supply will bring down prices.

In the absence of price controls, this measure will not deliver the expected results. Developers may make use of the incentives, but need not necessarily offer the apartments at discounted prices. The demand for second homes is flourishing and this will keep the market going at higher prices. If a lack of commitment from local governments was one of the reasons Chinese reforms failed, the huge rise in income levels of the privileged diluted the deterrents, one of which was higher down payments for second homes.

Incentives without obligations will not work. State governemnts should significantly increase the area under affordable housing. If they plan to continue with incentives and even think of enhancing them, they must be linked to price and other deliverable obligations. It is time for innovative institutions and mechanisms that are undiluted, and committed to affordable housing.

(This post is an upadted version of my column published in The Hindu on February 18, 2013.)