Explaining India’s Housing Vacancy Paradox

One housing paradox in many markets is the simultaneous presence of high costs and high vacancy rates. India has expensive housing relative to incomes and an urban housing vacancy rate of 12.4%. We show how insecure property rights in India, as a result of rent control and weak contract enforcement, increases vacancy rates. Using a two-way linear fixed effects panel regression, we exploit changes in rent control laws in the states of West Bengal, Karnataka, Gujarat, and Maharashtra to find that pro-tenant laws are positively related to vacancy rates. A pro-landlord policy change liberalizing rent adjustments could potentially reduce vacancy rates by 2.8 to 3.1 percentage points. Contract enforcement measured by density of judges is negatively related to vacancy. We estimate that a policy change in rent control laws would have a net welfare benefit and could reduce India’s housing shortage by 7.5%.