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What Mumbai, Delhi & Kolkatta can learn from Kathmandu
When a government imposes rent control they artificially lower the price of accommodation. As a consequence more people want to rent, and they decide that they need more space, now that they can afford it. Meanwhile, fewer landlords want tenants because having strangers living in their houses is not worth it any more. It becomes uneconomic to carry out essential maintenance or to build new accommodation. In Indias largest cities millions can only find homes in the slums.
When the government tries to kid itself and its people that housing can be had without paying what it is really worth the outcome is catastrophic and predictable: suddenly there is less housing to go around.
Renting a roof to sleep under became such an onerous task that Mumbai, Delhi and Kolkatta saw a significant part of its people living in slums in the midst of unimaginable filth and squalor. Nepal with its much lower per capita income - US$ 226 compared with Indias US$ 450 - does not have any slums in its capital Kathmandu.
This shows better than any other example the futility of government controls on prices in this case the price of rented dwellings. With all its poverty, Kathmandu with relative ease provides accommodation to almost all its residents. How? People left to their own devices have achieved what would have been impossible with any government intervention.
People should be always skeptical of any government control. The promised benefits seldom materialize. The adverse consequences of interference in the economic freedom of the people invariably manifests itself sooner or later.
Free markets have done an amazing job of providing people in Kathmandu with accommodation compatible with every level of income.
People who have just arrived from the village in search of jobs can get a room for a few hundred rupees - a situation unimaginable in Mumbai or Delhi. On the other hand those who can afford it can get as big and as luxurious a house as they want. A choice as wide as it exists today would disappear in any controlled environment.
Nepal should never institute a rent control act - legislation for which is demanded from time to time.
What if half of Kathmandus houses were destroyed by an earthquake? Would rent control be justified in such an emergency? No. Let us take the example of San Francisco in the U.S. Over half of its housing stock was destroyed by an earthquake in 1906. In a subsequent study by George Stigler and Milton Friedman, they reported that, in the absence of rent controls, rentals increased immediately serving two vitally important functions: (1) Housing stock was quickly rationed by price. No-one could afford to be greedy about the space they needed so many people found new homes. The remaining houses provided a shelter for an additional 40 percent. There was no shortage of housing or even a suggestion of it. Landlords and tenants were able to arrive at an understanding quickly and nobody remained homeless (2) Reconstruction work commenced immediately and was carried out in record time. Developers knew that their investments would be repaid by rents set at market rates.
This is an example of the wonderful invisible hand of Adam Smith at work. The price mechanism works smoothly, efficiently and unobtrusively.
This may well be contrasted to San Francisco in 1946 immediately after the end of World War II. This time the city had to absorb an additional influx of just 10 per cent. The job could not be done and the governor of California called it the most critical problem facing California. The difference this time was that rent controls were in effect. When intervention by government prevents or disrupts the functioning of the price mechanism, the resulting ruination is all too visible.
In India now the ravages caused in parts of cities which are covered by rent control, (Old Delhi for instance) have convinced authorities about the need for change. Delhi has introduced legislation partially doing away with rent control. Other cities are also trying to follow Delhis lead. If Indias officials have any further doubts, let them just come to Kathmandu and see how a relatively free-market provides housing to all.