A home rental exchange

The Finanacial Express

India is rapidly urbanising. Her urban population has reached 37.71 crore in 2011, growing by more than 31% each in the last two decades, or growing annually by 3.1%. Now, 31.16% Indians live in urban areas, though this is comparatively low considering China has 45% and Brazil 87% of the population living in urban conglomerations. India, however, expects the urban population to reach close to 600 million by 2031.

The last two decades saw the number of cities and towns grew to 7,935 from 4,615 in 1991. In another 20 years, India will have 87 large cities, or metropolise with a population of 1 million-plus, from 53 in 2011. Such rapid urbanisation calls for huge investment in housing.

The urban development ministry has estimated the 11th Plan urban housing requirement at 26.53 million units. Besides the problem of shortage, an average 25% city-dwellers live in slums in Greater Mumbai, slum-dwellers make up 54% of the population. This situation also needs correction.

Housing programmes have a direct bearing on the economy. Housing is seen as a surefire way to push up economic growth for all the material demand and jobs it creates. But what is holding back housing development is the archaic rent control laws in various states and cities. Creating a rental market is the key to driving up the housing sector. Clearing the hurdles in tenant eviction, along with incentives for buying homes for renting out, will make a difference to the situation. The low preference given in India for the rental market is surprising, given that the world lives in rental homes. A World Bank report says even in the developed world home-ownership rates vary from 35% in Switzerland to 80% in Spain (in the US it is 67.4%).

Moreover, a strong rental market will leave more disposable income in the hands of tenants and owners, which would in turn give a leg-up to the economy.

One way to boost the rental market is to have a house rental exchange in the public sector, modelled on the employment exchange. Both tenants and landlords can voluntarily register with the exchange’s portal online, citing their PAN or Aadhaar number. The portal will electronically match the tenant and house (for family or bachelor living) on a first-come-first-served basis.

A police-registered verifier will do house and tenant screening, and the rent agreement will be made online, using electronic stamp paper, providing for inflation-linked annual rental hikes. The tenant pays the landlord via the exchange, and the exchange collects a brokerage and processing fees from both parties.

The advantage is that the e-system will be on high alert against defaults. The exchange will deal with defaults and eviction, sparing the landlord the pain. Eviction will be easy since the exchange belongs to the public sector and enabling legislation is in place.

The landlord can claim tax breaks (already allowed on a second house if rented out) and concessional interest rate by pledging the property for renting for the loan tenure. This will encourage the haves to invest in property while the have-nots will live happily on rent instead of binding their lives to life-long EMIs and frugal living. The exchange will earn a sustainable revenue from brokerages, online advertisements and logistics services provided to the shifting tenants.

In the bargain, the governments will earn a licence fee from the exchange operator. Since all payments are accounted for, it will boost government income and curb black money.

One advantage of this system is that it will shield tenants from arbitrary rent hikes and the strong-arm tactics of brokers while giving landlords predictable income and investment appreciation, tempting them to invest more. (In the UK, buy-to-let mortgages made up 29% of total home purchases in 2006.)

Another advantage is that it will create service sector jobs, while taking away the job of none, as existing brokers will survive on property sale/purchase business.

Still another plus point is that it will end social biases in renting, since all communities will be treated equally. It will also provide the government with reliable data on housing requirements, job loss, migration and the like, and help it plan housing projects for the poor.

Banks can lend at competitive rates since assured rental income reduces lending risks. A rental default insurance can be thrown in to reduce the risk of service providers. Above all, the government can gloat over bringing rent control through the backdoor.

Public sector utilities can also run an exchange as an extension of their services.

But all is not so hunky dory. The exchange will need at least three years to breakeven. There may not be enough homes to rent out, in the first place. Landlords in private colonies may prefer rental income in black. (This can be remedied with compulsory registration later on.) The market can stagnate if new houses don’t come up. But eventually a healthy rental market will emerge.