India's Rental Housing: Balancing Demand, Affordability, and Policy Reforms
Anushree Harde and Akshaya Paul, Research Associates at The Energy and Resources Institute (TERI), share why India needs to fully realize the potential of rental housing and why it requires a supportive regulatory framework that encourages investment and development in the sector, addressing both fiscal and non-fiscal challenges.
Housing status in cities for an individual is a critical determinant to create access to services, employment, and credit. Apart from owning a house, which is a dream for every person, rental housing is also quite important, especially in cities, but historically, India has paid little attention to this segment.
The draft National Urban Rental Housing Policy (NURHP), 2015 was the first official acknowledgment that homeownership alone cannot solve the urban housing shortage. The policy recognises that the majority of the housing shortage pertains to economically weaker sections (EWS) and low-income group (LIG) who cannot afford decent housing due to financial constraints. Addressing the Affordable Rental Housing Complexes (ARHC) scheme was launched to provide affordable rental accommodation. It initially aimed to convert 83,534 flats; however, only 5,648 flats have been successfully transformed into rental housing.
The last Union Budget announced initiatives for urban development with enabling policies and regulations for efficient and transparent rental housing. Undoubtedly, it is a right step to providing shelter to urban dwellers who have migrated to the cities for better work opportunities. Under PM Awas Yojana Urban 2.0 (PMAY), with the aim of “housing for all”, housing needs of 10 million urban poor and middle-class families are set to be addressed with an investment of INR 1,000 billion.
Affordable Rentals in Cities: A Growing Necessity with Limited Supply
Daily wage earners and informal sector workers, a significant portion of the urban workforce, rely on rentals due to high property prices. In India's cities, an estimated 26–37 million families live in informal housing. These informal areas often lack basic amenities with high housing space density and are not covered by formal rental agreements which leads to issues such as insecurity of tenure and lack of legal protection for tenants. In cities, rental housing is a growing necessity for a diverse and migrant population. People relocating for work, students, public sector employees, and informal sector workers often find home ownership a distant dream due to financial constraints. Many migrants do not want to own a house and opt for rentals which provides them mobility and flexibility for better job opportunities elsewhere. Therefore, young professionals prefer renting, even if they plan to stay long-term. When it comes to LIG migrants, rental housing is often the only affordable option.
Ironically, Census 2011 revealed 11.09 million vacant houses in urban India, largely due to the absence of such a rental housing policy that satisfies concerns of both house-owners and their tenants. Since then, little has changed and even today a very large number of built houses remain vacant. The current restrictive rent control laws were designed to protect tenants by capping rents and preventing evictions. However, they created market distortions, ignoring inflation and maintenance costs, ultimately stifling the rental market. The rental housing plummeted from 54% in 1961 to 31% in 2011, as house owners are unable to charge fair rents or evict defaulting tenants, allowed properties to deteriorate or kept them vacant. This led to a severe shortage of affordable rental housing, pushing many into shelter poverty with inadequate quality of life.
Unlocking the Potential of Urban Rental Housing: Policy Reforms and Future Prospects
Despite these challenges, there has been a rise of co-living spaces in the rental market. Catering to young, middle-class professionals, co-living provides flexible, cost-effective rental options with basic amenities and privacy. There are niche segments in rental market, such as accommodations near educational institutions or universities, working professionals' hostels, etc., which are in high demand due to the transient population seeking secure and convenient living spaces. However, to fully realise this potential, India needs a supportive regulatory framework that encourages investment and development in the rental housing sector, addressing both fiscal and non-fiscal challenges.
The Indian government introduced the Model Tenancy Act, 2021 to streamline the rental housing market and balance the interests of both tenants and landlords. The Act encourages private investment and formalises the sector with the intent to fill the policy gap between housing ownership and rental housing. However, the response to adoption of the Act was muted. Further, rental housing should be made more affordable where the government may provide subsidised land for low-cost rental housing or cover the cost of the land. Additionally, it should incentivise the private sector to invest in low-cost housing with fair profitability without a compromise on quality. The employers/owners of the vacant land parcels within larger facilities can optimally utilise and earn a rental revenue stream by registering dwelling units under ARHC scheme.
The selection of housing sites is imperative, as neglected neighbourhoods on the outskirts tend to be chosen for the urban poor without any upgradation of public services. This has a ripple effect on commuting time and expenditure as it takes longer to commute from these distant peri-urban areas for employment, mostly situated in the urban cores. In the long term, universalisation of public amenities should be targeted to provide these amenities to all.
Urban rental housing in India is poised at a critical juncture, with opportunities for reform and development that could better address the needs of the urban population. However, since housing is a state responsibility, successful adoption of acts and policies depends on state willingness, which has been challenging. To overcome this, the Union government should incentivise states, while state and city governments should offer tax breaks and expedite approvals for low-cost rental housing projects. Urban planning must also prioritise affordable rental options, ensuring that affordable rental housing contributes to India's housing-for-all goal.
