How Does the Prevailing Rental Policy in India Compare With That of Other Global Cities?

Rent Jul 28, 2021

With the recent release of the Draft Model Tenancy Act (2021) ('the MTA') , the central government is seeking to institutionalise the rental housing sector in India. If the MTA is adopted by the state governments, the prevailing state-wide rent control regulations will be repealed. Consequently, landlords and tenants will be able to enter into tenancy agreements at the prevailing market rates. However, the annual increase in the rent amount will be capped.

Rent control in India

The respective rent control regimes of the state governments, imposed a ceiling on the rent payable by tenants. For instance, in Maharashtra, rent was capped at a 12.5 percent return on cost of construction plus cost of land at the time of construction on certain protected properties. It allowed an annual increase at a fixed rate which was well below the prevailing inflation rate. [1]

Thus, rent control led to the freezing of rents at rates substantially below the market rates. This had multiple fallouts including-

  • The proliferation of informal rental housing whereby tenants and landlords entered into rental arrangements at market rates
  • The dilapidation of rent controlled-properties since landlords were disincentivized from investing in their improvement
  • The proliferation of vacant houses since property-owners were unwilling to rent out their properties

The MTA proposes the dismantling of rent control. It also seeks to establish three-tier quasi-judicial mechanism to govern tenancy agreements in residential and commercial premises and undertake dispute resolution by instituting district-level Rent Authorities and Rent Courts along with state-level Rent Tribunals.

Rental housing in other countries

Several countries such as the United States and Singapore prioritize home-ownership over rental housing. However, such a policy may not be suited for low-income countries like India where there is considerable rural-to-urban migration taking place. Owning an illiquid, undiversifiable asset such as a house would impose constraints on low-income families with volatile incomes. [2]

Rent control

In the case of rented properties, irrespective of the actual stock of rental housing in Australia, Austria, Canada, Denmark, France, Germany, Ireland, Japan, Mexico, the Netherlands, Sweden and the United States, rent controls are applied only to a portion of the housing stock [3]. In Germany for instance, rent controls are imposed only on those properties which are located in areas where there is pressure on the housing market. In the Netherlands too, rent controls are applied to those ‘affordable’ properties on which the rent charged is below a certain rate.

Source: Global Property Guide- Rental Yields: Why are they important

Share of rental housing out of the total housing stock

According to a World Bank global study, the percentage of people who rent their home is highest in the largest cities within each respective country, as high land and housing prices make it prohibitively expensive to own property. For instance in Berlin and Geneva, home-ownership rates were as low as 17 percent [4] and 18.1 percent, respectively in 2021. [5] The ownership rates also vary considerably based on whether the properties are located in the city or closer to the suburbs. In New York, for instance, the share of rental housing was around 24 percent in 2018 in Manhattan and around 70 percent in Staten Island. [6]

Source: OECD- Housing Tenure Distribution (2019 or latest)

(You can find a detailed review of the evolution of rental policy in India in different States in our white paper titled 'Reforming Tenancy Regulation in India')

[1] IDFC Institute (2018)- India Infrastructure Report: Making Housing Affordable

[2] Ibid

[3] OECD (2021)- Rental Regulation

[4] (2021)- Strong tenant protections and subsidies support Germany’s majority-renter housing market

[5] (2021)- Only 36% of Swiss own their homes

[6] (2019)- Snapshot of Homeownership in New York City

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