One of my favourite movie scenes is from “It’s a wonderful life”. The hero, George Bailey, is a reluctant banker. On his wedding night he has to deal with a bank run. In trying to stop the bank run, he tries to explain the concept of illiquidity to his depositors. " "You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can." George's vision of banking is infectious: it is not about pieces of paper or ledgers. It is about helping people build houses and dreams. This vision drives me. Along with my awesome team at IFMR Trust (where I am the president), am obsessed with seeing that all of India has access to high quality financial services; be it a daily wage labourer seeking to protect her Rs. 100 wage from inflation or a municipality issuing its bonds to build sanitation for its residents. I believe that finance, when done well, can be a tremendous force for good. I live and blog from Chennai (and planes) but most of my stories are from Thanjavur, Ganjam and Uttrakhand.
I read an excellent post by Ajay Shah recently that questioned the policy wisdom of emphasising house ownership over rental housing. His concerns stem from hampering the mobility of labour and worsening risk diversification in the portfolios of households. While these concerns are true for most households, they are much exacerbated in the case of low-income families.
Take a typical worker employed in the construction sector earning, say Rs. 4500 per month. He faces two significant risks to income: accident/health shock resulting in temporary or permanent disability and unemployment resulting in temporary or long-term loss of income. Given this inherent income volatility, the obligation of a fixed Equated Monthly Installment (EMI) over a long period of time to finance the house purchase seems unsuitable. While capital appreciation as a motive might make sense for households with more stable incomes and low exposure to real-estate otherwise, the volatility in this case becomes a real stumbling block. A rental contract provides the much-needed flexibility to reduce housing expenditure when shocks occur and also the ability to migrate when the nature of economic opportunities shift, as they are likely to over a period of time. My colleagues have an interesting paper that simulates household wealth under ownership housing and rental housing that makes this point clearer.
While there is no question that the steady growth of the housing finance market must continue, particularly for those households for whom real-estate exposures are low and those that have income streams that are uncorrelated to the performance of the local economy; for self-employed households; households for whom principal income source is a small business prone to economic cycles; and low income households of all types, there has to be an almost complete shift towards a rental market and away from ownership.
Despite all the economic merits, rental markets in India remain vastly under-developed. Development of rental markets will receive a fillip from a) clarifying the entire legal basis of rental markets, repossession and rent control b) facilitating access to developer finance for rental housing c) developing the Real Estate Investments Trust vehicle (REITS) and d) channeling more long-term funding from insurance companies and pension funds to these markets.
In addition to rental ownership-friendly policy, there is also room for interesting business models. Take for example, Aarusha Homes that provides dormitory services to entry level low-income working people at a very affordable cost. This considerably reduces the entry barrier for a young person seeking employment in the city for the first time. The need for flexibility surely results in a willingness to pay. (Separate post to come on the merits of migration from villages to semi-urban and urban centres)
(I thank Anand Sahasranaman and Nachiket Mor for their insights on this issue)