Time to focus on Rental Housing

Harvard researchers predict that over the next ten years, India can become the world’s fastest growing economy. The real estate sector, the highest job-creating sector after agriculture, has a significant role to play. The government can chip in with the role of an enabler.
Alas, it hasn’t worked that way.
Poorly formulated housing policies can trigger an economic and financial crisis. So, what we need are good policies to support growth in long-term living standards and strengthen macroeconomic stability. Here are a few things the government can do.
The government should intervene in housing markets to ensure equitable access to housing. These interventions could include fiscal measures such as taxes and subsidies, the direct provision of social housing, and various regulations influencing the quantity, quality, and price of houses.
These policies will impact the overall economic performance and living standards, in that they can influence how households use their savings as well as residential and labour mobility which is crucial for reallocating workers to new jobs and geographical areas.
Remember, adequately supervised financial and mortgage market development, combined with policies that enhance housing-supply flexibility, are key for macroeconomic stability.
In a country like India where there is continuous growing population, there is tremendous pressure on the housing markets. The rental property market is the only available option for most people who migrate into a city either for employment or for nurturing their careers.
There is always a demand for rental housing regardless of how the home sales market is performing. This is because rental housing has a positive impact on the development of a city.
Focus on infrastructure and land acquisition
Infrastructure in many Indian cities is inadequate to meet the growing needs of its population. Many people do not move into houses they bought because of lack of amenities like shopping markets, good roads, hospitals, etc. in that area. If there is greater investment in infrastructure in areas that need such facilities, it will lead to opening up of more of the urban landscape for development. This will make housing less expensive, and more people will be able to live away from their employment centres.
But, constraints in the Land Acquisition Act has made things difficult. Thereby real estate development has become expensive. Developers getting entangled in legal battles over land is par for the course. Historically, the world over, when construction becomes expensive, people begin to live in informal settlements aka slums. Data show that nearly 17 percent of India’s population live in slums.
When the title to property is not clear, you don’t have an incentive to invest in improving the housing standards. It also freezes valuable urban land. If the government can legalise these settlements, the informal economy could be brought under the ambit of formal law. This will lead to redevelopment of many households. Here affordable housing could act as a preventive for such unorganized growth.
Innovations in mortgage markets should be coupled with appropriate regulatory oversight and prudent banking regulations. This would increase access to credit and lower the cost of housing finance.
Eleven percent of the entire housing stock is in the rental market. Since 1961, the fraction of the houses in the rental market had declined by over 70 percent in cities like Mumbai. The reason was that rent controls were not eased while allowing for the development of buildings by raising the floor space index (FSI). As most households with low-income levels cannot afford to buy houses, the function of the rental housing market is of great importance. FSI is an important factor in the housing market. Restrictions in this regard prevent redevelopment of old buildings.
Another interesting fact is that rental properties come with variation in budget sizes. The higher one’s budget was, there was scope to get a better place regarding location or size, accompanied with amenities. These ranged from single family homes to high-end multi-bedroom apartments. Rental housing catered to a whole spectrum of income groups.
Developing cities see migration from the hinterlands. We must develop the suburbs and surrounding spaces to meet this demand. This ensures that the wheels of the economy are sufficiently oiled and pulled by the cogwheels called rental housing. Otherwise, we would be staring at a major man-made crisis.

Why rental income is a Myth ?

Buying a second home is a common investment choice not just in India but also globally. The rationale for investing in a home that also gives rents is simple to see. The investor gets the benefits of price appreciation as well as steady cash flow. In many countries where the interest rates are low and rents are high, it is possible to fund the second home purchase from the potential rent and repay it from that.

Rents also go up with inflation and hence act as a hedge against it. When investing in a locality that is just coming up, as infrastructure develops, rent also increases, providing rich price appreciation and rental income growth.

That said, there may be some cons to the idea of buying a property with rent as the motivator. One, renters seek a minimal social infrastructure. If the house is in a remote location, finding a renter may not be easy. So the house may remain vacant until facilities such as schools, shopping and hospitals come up.

Two, the rents you may earn may not be high. Rental yield – the ratio of annual rental income to the investment amount – tends to be under 3 per cent in many areas in India. So a house bought for Rs 40 lakh may give you a rental income of Rs 10,000 per month on average after accounting for expenses. Many other investment options will offer better returns than this. For instance, investing the amount in fixed deposits may get you similar returns for less risk and hassles. The main gain tends to be in price appreciation and rents are seen as a bonus.

Three, the house requires ongoing maintenance to retain value and also the tenant. This may range from painting, handling plumbing and other issues that come up from time to time. Depending on the age of the house, these may reduce your returns further. Also, if you don’t live nearby, handling these issues – finding reliable help to do it in a timely way – may be complicated.

Four, there may also be tenant related problems. For instance, rent may not be paid, upkeep may be poor, they may not abide by society rules or have disputes with neighbours; they may refuse to vacate the house when you ask them to leaving you in a difficult situation. While there are agreements between landlords and tenants, the legal system is not easy to navigate and home owners may face a lot of hassles in getting a tenant vacated.

Five, when a tenant vacates, the house has to be repainted and made ready for occupation. You may also have to pay a broker or an intermediary some fee for finding a new tenant. Delays in getting a new tenant would mean loss of rent and overall lower return.

Six, one can consider earning higher returns by renting the property to offices or for short stays. There may be restrictions from the housing society against such choices. Also, short term rentals require a lot of time investment to be profitable. So it may not be a choice for many who may be busy and want to consider passive investments.

Data from CBRE shows that around 1.2 crore completed houses are lying vacant across urban India. The unattractive rental yield coupled with low landlord protection in the legal system makes owners decide to lock the house rather than rent their home. It is indeed ironic, given that urban housing shortage is 1.88 crore units currently. Similar to developed countries, over the years as regulations change, rental home investments will likely be lucrative; but currently residential investments in India with an eye on rents are not a very attractive choice to consider.