Housing is expensive in India. This is usually attributed to factors like population size, land scarcity, high construction cost, black money, nuclear families, vacant properties, low floor space index, monopolistic agencies like Delhi Development Authority, and the behaviour of developers and various intermediaries.

Each of these factors can be important in some areas and yet the big picture for India is different. Home prices are high mainly due to the high price of land. This is, in turn, because only 0.2 per cent of the national land mass is occupied by the top ten cities in India (Das, Prashant, et al. 2019, Real Estate in South Asia). There is a similar story across urban India more generally. And, the prevailing “regulations” on real estate development go way beyond the zoning laws that are needed for orderly development.

There are excessive restrictions on supply in different ways — open and subtle. Factors like slow and discretionary approvals, and corruption are parts of the more familiar story. But this is not all.

Existing cities keep getting extended but it is very costly and messy to expand housing and infrastructure in this fashion. We have serious congestion, and high prices. We need several altogether new cities.

Urbanisation in India is still at 34 per cent; we are way behind China even after considering their excesses. Very few new cities have come up over the last 77 years in India (cities like GIFT City and Amravati are exceptions). This needs to change. It is true that the government is spending heavily on infrastructure but this is mainly on highways, ports, etc; it is not on infrastructure for new townships. Nor has the government proactively, decisively and clearly used an enabling policy for real estate companies to provide infrastructure for some new cities in a phased manner under State “masterplans”. So, the supply of new homes is very limited relative to the needs of the economy.

Rural land

Relatedly, the price of urban land that is already approved and has infrastructure is high. And, the nearby areas too can get somewhat expensive. Now let us come to the price of the main rural land. The phenomenon of under-allocation of land for urban India, of course, implies excess land in rural India. This suggests a very low price there. But this is not what we observe. Why?

Farmers are, by and large, reluctant to sell land, even though the income from farming is dismally low. The reluctance is, in turn, due to some very disparate factors that include low real interest rates on alternative assets like bank deposits, limited meaningful alternative livelihood opportunities, and expensive housing in cities.

All these are the very reasons why the pricing provisions in the Land Acquisition Act, 2013 Act were stringent in the first place. So, although the price of rural land is less than that of urban land, it is not very low.

Overall, we see then that the high price of homes in urban India is mainly due to the inadequate additional supply due to policy reasons, and the rural land is not available at very low prices for reasons that show up in the pricing provisions in the 2013 Act.

We have a vicious circle here. Given the reluctance to sell land in rural India, we have limited urbanisation. And, given the inadequate urbanisation, there are limited alternative opportunities in urban India. So, there is indeed reluctance to sell land in rural India.

The main policy solution is to phase out the policies that restrict the supply of housing in existing and new cities. The additional approvals of land, and the additional provision or the enabling of the provision for infrastructure can, after a slight lag, substantially increase supply of homes and reduce urban real estate prices.

This can, in turn, make it less difficult to amend the pricing provisions in the 2013 Act, which can reduce the price of rural land. It will also help if the other concerns are addressed so that farmers are less reluctant to sell their land.

Misallocation of resources

The suggested policies can reduce home prices. In contrast, a scheme like the Pradhan Mantri Awas Yojana (PMAY) reduces costs for the buyers mainly through a subsidy in one way or another. So, it is public money at work. What we need is public policy instead.

At present we have too much rural land and too little urban land. Due to such and other misallocation of resources, we have, what economists call, a dead-weight loss. This is a loss to the economy as a whole. And, it is huge in this case and it recurs year after year.

Reducing such a loss is itself an important part of the answer to the question of the feasibility of many new cities.

It is true that public money and state capacity are limited but there can be an enabling policy under which companies and even cooperatives and public sector agencies can build new cities, charge the buyers for the infrastructure that they provide, and carry out the marketing in the broad sense of the term. Think of Gurugram — at least in its early stages.

Additional housing has been meaningful due to the ample work opportunities there. An important driver is the low price of real estate initially, though with some risk. But there are lessons from Gurugram so that fewer mistakes are made elsewhere.

Given that the land price is at present high, even where it is a consequence of policy, the emphasis is often on high-rise construction which tends to be capital intensive. This is the situation in a labour abundant economy. But it can be different if land is cheaper. Then we can have simple low-rise constructions in much of India. Then there is greater scope for increasing employment. In conclusion, the “market” prices of homes are high in India mainly due to policy reasons and they can be lowered mainly with policy changes.

The writer is an independent economist. He taught at Ashoka University, ISI (Delhi) and JNU