Tuesday, November 07, 2006

The Carpetbaggers

The write-up below appears in this week's Hafta. Expectations were running high from this housing policy, given the unabated rise in property prices, as well as infrastructure issues. However, the policy turned out to be toothless and a wash out.


Housing by carpet

The recent draft housing policy unveiled by Maharashtra’s Chief Minister, Mr. Vilasrao Deshmukh, has raised more questions than provide answers to long-standing housing problems in Mumbai. The policy, which has been seen as a damp squib, is still in the draft stage and will now go into discussion for about two months with various bodies before becoming law. We look at a few recommendations of the policy.

The recommendation that has raised the most questions pertains to land transactions now being charged on the basis of carpet area as against current industry practice of charging on the basis of built-up area. Carpet area, simply put, is the area where you can literally lay down a carpet that covers your entire flat. As against this, built-up area includes the walls and super built-up area adds lifts, staircases, entrance area, flower-beds, and anything from the builder’s creative mind that goes to increase the headline area he tells you while tempting you with that dream house. In effect, you land up paying for a whole lot of area that you do not use and probably do not own. This practice is called loading, and is typically measured by how much the built-up area exceeds the carpet area. While the accepted loading norm used to be about 25% (to cover the builder’s costs), it has steadily inched higher to 30-40%. For example, when you buy a flat with built-up are of 1,000sqft, the actual carpet area is typically about 650sqft.

The Government now wants to make it mandatory for buying/selling of land to be done on a carpet area basis. With this, the Government expects property prices to fall by 30-40%, simply because it assumes that with the rate remaining the same, a lower area (i.e. the carpet area) would mean a lower price. However, after talking to a few brokers – and going by the reaction of most builders – what the industry expects more likely to happen is that property rates would in fact increase so as to keep the value of the transaction intact. So much for reform.

To be fair, this proposal is being seen as a positive step, if only to increase transparency and keep a check on builders in an industry shrouded in under-handed dealings and black money. The move is also supported by home finance institutions, for example, HDFC’s Chairman Mr. Deepak Parekh has in the past called for builders to move towards carpet area based pricing of houses.

The draft housing policy also includes a recommendation for builders of large projects to reserve a portion in these projects for smaller flats (400-500sqft). With this measure, the Government expects to provide affordable housing for low and middle income groups. In return for these lower-area flats, the Government will provide higher floor-space-index (FSI) to the builder. However, the policy has neither specified how much extra FSI would be provided nor how the Government would monitor implementation of this measure. Implementation would remain critical considering that builders have in the past misused similar provisions by merging low/middle income apartments group to create larger ones and then selling them off to higher-income groups .

The draft policy also recommends an FSI increase from 0.5 to 1 in the extended suburbs of Mira-Bhayendar, Vasai-Virar, Thane, Navi Mumbai, etc. Interestingly enough, some time back the World Bank had met the CM and expressed interest in providing assistance of US$5billion (over 10 years) for development of Mumbai’s neighboring areas.

Another key recommendation, which could become controversial in the future, is the move to invite competitive bidding for slum redevelopment projects. If implemented, this could mean a change in Government thinking away from the existing rule of obtaining consent from 70% of slumdwellers in an area. Hafta readers would also recall our interview with housing activist, Mr. Chandrashekhar Prabhu, who had this to say about slum rehab schemes:

“The schemes are not catering to the poor and are always meant to make money for the builder. The committee which formulated the current rehab scheme had no slumdwellers, but only builders. Now, would someone making such a scheme make it in a way to benefit someone who the same builder is going throw out? It was never meant to be a slum dwellers scheme. The Govt also appointed a committee under Mr. S. S. Tinaikar, former BMC Commissioner. He made a 700-page report whose summary says that this slum rehab scheme is of the builder, by the builder, for the builder; it should hence be stopped forthwith and an alternative scheme should be worked out with the contribution of all stake-holders.” [Link]
The policy has also failed to lay down a definitive timeline for repealing the Urban Land Ceiling Act (ULCA). As discussed in an earlier Hafta piece, the repeal is a key reform process from the perspective of infrastructure funding for Mumbai under the Jawaharlal Nehra National Urban Renewal Mission. While the repeal of the Act found no mention in the policy, the Chief Minister has indicated that the matter would be taken up in the winter session of the legislature (due to begin in Nagpur on Dec 4th). Mr. Deshmukh also stated that the Government has acquired 400 hectares in Mumbai under this act in the last two years and expects release of this land to bring down property prices by 30-40%.

At a time when the Government should have taken a bold and reform-oriented stance it has paid lip service and failed to tackle the issue of sky-rocketing property prices in Mumbai. Yet again, the quest for a reasonably priced house in this city of dreams remains just that – a quest for many. No wonder then, that the term “affordable housing” in this city sounds more like an oxymoron.


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