The Ruin of Mumbai

Saarthak Gupta

Mumbai’s land use regulations are designed to keep population density low. Instead, they force Mumbaikars into slums, while all of India pays the price.

A few years ago, following a peculiar series of events involving a family friend and an international political incident, I found myself living in a two-room apartment in Mumbai at a rate steeply below market. Many of my colleagues at the consulting firm I’d just joined had found similarly novel ways to reduce
their rent. 

One lived in a naval hostel with strict curfews. Another rented an apartment in a slum rehabilitation building, or SRH — state housing built for residents of Mumbai’s informal settlements. One roughed it in an older unit, at least until his ceiling caved in and rained concrete on his bed.

But compared to the majority of Mumbaikars, we had it good. Something like half 1 of the city’s residents live in slums: densely packed houses with corrugated steel roofs overhead and open drains in front. Some rent out spaces in unfinished construction sites. Others sleep in tent cities along the sidewalk. On my way to work, I’d regularly see families wealthy enough to afford cars living in partially collapsed brick buildings, the cross-section of life inside a vivid reminder of the failures of the city’s urban design. 

In some sense, Mumbai’s housing crisis is simply a more exaggerated version of the housing problems that plague cities in the West. Mumbai is the wealthiest city in India. It contributes over 6% of India’s economy, 30% of its income tax, 40% of its trade, and 60% of its customs duties. Its per capita GDP in 2015 stood at $5,328, more than 3.3 times that of the country as a whole. And yet, half of the population lives packed into just 12% of the city’s available land. 

As in the U.S., Mumbai’s housing crisis has many causes. Much of the problem is due to the relative poverty (compared to the first world) and extreme population density of the city. Some of the issue is geography. Mumbai sits on a peninsula; business and industry are concentrated at the tip, forcing its population ever farther northward. But a large part of the housing crisis can be attributed to draconian restrictions on housing — both new and old. And it’s not just those trying to make a living in Mumbai who suffer from these policies — they stifle growth in India’s economic and financial center.

Housing Manhattan in two-story buildings

Cities across the world use different mechanisms for restricting the bulk of buildings. In New York, “setback” rules govern the amount of light that reaches a city street. This incentivizes developers to design buildings that taper as they grow in height — famously giving rise to the wedding-cake-style skyscraper and the iconic shapes of the Chrysler and Empire State Buildings. The 130-foot height restriction in Washington, D.C. — meant to highlight the Capitol and Washington Monument — has shaped the city’s blocky urban form. Amsterdam’s famously narrow homes are largely the result of a medieval Dutch tax regime that levied taxes based on the width of a house’s frontage. 

Mumbai primarily controls building height via floor area ratios (FAR), a formula which pegs the total allowed floor space of a building to the size of the lot it’s on. 2 An FAR limit of 1 means that a building on a lot of 4,000 square feet may have, at most, 4,000 square feet of internal floor space. In the absence of other restrictions, the builder could build a one-story building on the whole plot, a two-story building on half the plot, or, to take it to an extreme, a one-story building on half the plot with a 2,000-story extension on a single square foot of plot space. Unlike maximum height restrictions as in D.C., FAR allows for a greater variety of urban forms. But Mumbai’s FAR stands far below that of other large cities, despite the fact that it is, by some measures, the second most densely populated city in the world. 

Until 2018, Mumbai restricted FAR to 1.33. New regulations allow FAR of 3 on residential plots and 5 for commercial plots, but only along major thoroughfares. Because most roads in Mumbai are narrow, a majority of buildings receive much lower FAR allowances. Experts estimate that almost half of the city’s roads are between 9.2 and 13.4 meters wide. This would mean that the buildings adjoining these roads will have a maximum allowable FAR of between 2 and 2.4. 3 General FAR ceilings are built with innumerable loopholes and possible circumventions in mind. But these exceptions are likely to only marginally increase FAR, and only then for developers with the ability to navigate the red tape to access them. 4  

Compared to most major cities throughout the world, Mumbai is an outlier. Manhattan is largely zoned between 3 and 12 FAR. Tokyo’s central business district goes up to 20. Singapore allows a maximum of 25. San Francisco manages commercial bulk with FAR, maintaining varying restrictions in different neighborhoods; the Mission Special District, for instance, goes up to 9. Hong Kong, a city with its own history of slums, has a top FAR of 10. Dhaka, Bangladesh, maintained a top FAR of over 9 until last year, although this seems to have been reduced significantly in the latest development plan. The American Planning Association reports historical FARs in Chicago with allowances for commercial districts ranging from 1.2 to 16, and .5 to 10 for residential zones. Since Chicago’s population density is 17% that of Mumbai’s, residents in its lowest-FAR zones still have more floor space per capita than those in Mumbai’s highest. 

Floor Area Ratio rules in Mumbai follow a long tradition of bulk restrictions aimed to control population density in the city. The Municipal Corporation instituted formal building height restrictions in 1897, and later updated to specify that light must be able to reach the street at a 63.5 degree angle. FARs were established in the 1960s, with the explicit goal of limiting Mumbai’s population to a maximum of 3.4 million by 1980. 5

It would be an understatement to say these restrictions haven’t worked as intended. Today, the population of Mumbai is estimated to be over 17 million, and 25 million for the metro area. The city’s metro area is 13 times as dense as the New York City metro area, 4 times as dense as London, 6 times as dense as Tokyo, and even more dense than the island of Hong Kong. Only two similarly sized cities have higher population densities: Dhaka, which suffers many of the same issues at a similar development level, and Kinshasa, which is far poorer. Nairobi and Lagos are roughly one-third as dense, while Johannesburg is less than one-sixth the density. Instead of reducing overcrowding, regulations have forced Mumbai’s population into smaller and smaller living spaces. 

Compared to NYC’s 531 square feet per person, Mumbai’s residential density sits at less than 90 square feet per person. 

Density, depending on how you look at it, can foster growth or inhibit well-being. High population density within a square kilometer allows for increased agglomeration effects — the economic benefits that come when a large and diverse labor market is located close together. In poor countries, doubling a city population leads to somewhere between a 2% and 10% increase in per capita GDP. But high population density doesn’t require the existence of crowded conditions — so long as we build upward. 

Instead, Mumbai has chosen to restrict population density at the cost of overcrowding. Although Mumbai’s official density is similar to that of Manhattan, its living conditions are worlds apart. Houses in Dharavi, the city’s largest slum, generally do not come with attached toilets; residents often use open sewers or waterways instead. Houses are informally constructed of corrugated steel. Families live together in 120 square feet of space. Garbage is everywhere. 

Dharavi may seem like a cautionary tale in support of density restrictions. But if we look outside the slum, we can see that density doesn’t have to be associated with poverty and overcrowding. The Malabar Hill neighborhood in Mumbai is about as dense as the city as a whole, and yet remains its second wealthiest. More globally, Yorkville is one of New York City’s wealthiest neighborhoods as well as its densest — more than twice as dense as the Mumbai metro area as a whole. 

FAR restrictions aren’t the only policies that impede Mumbai’s growth, however. While FAR ceilings directly restrict development by setting a cap on the total buildable volume, Mumbai’s stringent rent control policies disincentivize landlords from investing in new housing or upgrades on older housing, and thus functionally set a cap on the size of the rental market.

The Bombay Rent Act

In imitation of the rent control acts that had popped up in the West during the second World War, the Bombay Rents, Hotel and Lodging House Rates Control Act of 1947 froze rents in the city at or below 1940 levels, or the rental price of the first letting for newer units. The act was repeatedly extended until 1999, leaving rents frozen at nominal levels set almost 60 years prior. The law was finally superseded by the Maharashtra Rent Control Act, which set rent control for the entire state. The new act set rents at the standard rent fixed by courts under prior rent acts plus 5% and allows for a 4% annual increase, as well as increases to recoup costs (plus a 15% profit) on improvements made to units.

Source: Our World in Data

The 1999 act is a marginal improvement over the original, but still doesn’t provide adequate incentive for investment. The annual 4% rental increase is below Indian inflation since 1999, below current Indian treasury yields, and far below the increase in demand or the increase in per capita GDP. At the allowable annual increase, the value of rent diminishes sharply over time. If the average Indian landlord received 30% of their income in rent in 1999, and received 4% annual nominal rent increases, they would be making only 8% of their income from rent on those units by 2021. Even more starkly, the act does not address the lag in rents from 1940 to 1999. A unit rented out under the 1947 rent act would have its rent pegged to 1940 prices until 1999, at which point a one-time 5% increase would be allowed, and a 4% annual increase thereafter. 6

Rent control was meant to protect tenants from acute rental increases, but by disincentivizing landlords from building, purchasing, and letting units, it has all but destroyed the rental market in the city. As rents still cannot track market rates, and as this makes it difficult for landlords to accrue adequate returns over the long run, virtually all new housing is owner occupied. Between 1961 and 2011, the number of formal rental units in Mumbai increased by less than 5% while the metro population quadrupled. The number of owner-occupied units meanwhile increased by 2,500%. While rent control continues to allow older tenants to pay next to nothing in rent, it prevents the creation of formal housing stock for newer tenants. Even if Mumbai’s FAR restrictions allowed developers to build more housing, the lack of rental market dampens the financial incentive to build rental units. And given the growth in the city’s population over time, the aggregate loss is staggering.

As with FAR ceilings, there are ways to circumvent these restrictions on the margin. Nineteenth-century laws governing easements allow for makeshift rental agreements that at times have been exempt from rent control. A newer, higher-friction workaround is the introduction of a pagdi system, in which tenants pay roughly 80% of the purchase price of property up front, to be returned at the end of their lease. And in slums, informal rental agreements abound. But these makeshift solutions do not replace the formal rental system fully, as tenants lack formal protections, and they may be forced to put up massive amounts of collateral or to accept easement contracts of shifting legality. On some level, these workarounds are less proof of rent control’s surmountability than an illustration of its costs — if people are still willing to enter into rental agreements in informal and unfavorable terms, think of how much value the lack of a formal rental market is leaving on the table.

Housing, density, and welfare

Easing building restrictions would have large benefits for many groups. Current residents would benefit from reduced costs, better living conditions, or a reduction in their commute times. One study finds that even the cost of longer commutes due to FAR restrictions (as people are forced to live farther from the city center) is substantial. They estimate that increasing FAR by 1 for the average Indian city would increase incomes by 0.7% as people move inward from the periphery. Another estimate of commuting costs finds that height restrictions in Bangalore cause a 3%-6% first-order loss in GDP. 

However, the greatest beneficiaries of housing liberalization may be those who are least visible — those newly able to move into the city. One estimate found that migrants who move to cities in the Global South report increases in income as high as 30%. A separate RCT conducted in Kenya, meanwhile, estimated that households with family members who moved to Nairobi experienced an over 150% increase in income. An increase in migration partially offsets the benefits to current residents, but so long as that increase doesn’t exceed the increase in housing stock, the housing conditions of current residents should improve across the income spectrum. 

Additionally, by allowing for a vibrant rental market, Mumbaikars would be able and encouraged to move and relocate such that the most expensive housing is used most productively. Renters would move nearer to their work, as opposed to holding on to their below-market-rate units at all costs. Some may even move out of the city if the price of rent isn’t worth the increase in earnings. 

Concerns around the possibility of overloading the commons are real — Mumbai’s roads are among the most congested in the world, and its already-stressed sewerage system could get even worse. Discussions around FAR also resurface fears of street-level overcrowding and the taxing of public infrastructure. But these don’t seem like insurmountable obstacles. Allowing for higher FARs in formal construction would increase the tax base of the city, allowing it to better deal with the challenges of density. And if we are to believe the benefits of agglomeration, we may expect increased productivity to again bolster the city’s budget.

An immodest proposal

My acquaintances in India often discussed China in terms of a great powers competition between the two countries. If such a competition exists, it does so only in their minds. By pretty much any economic or military metric, India is far behind China. But perhaps the greatest illustration of where India lags is in the visual gulf between their great cities. In the course of two decades, Shanghai went from a collection of low-rise buildings and sprawling slums to a city of skyscrapers. No such transformation has happened in Mumbai. In fact, many smaller cities in China now look far taller and more economically vibrant than Mumbai. 

The concern isn’t aesthetic or a matter of national pride. It’s difficult to overstate how important Mumbai is to the country’s economy. The city’s income tax share is twice that of the entire U.S. state of California. And much more than cities in the state of California, Mumbai’s growth is damaged by extreme restrictions on building and rentals — restrictions that only grow more binding every year. By limiting the effects of agglomeration, the city’s building and rental restrictions exert an immense drag on the city’s ability to drive growth on the national level. Consider that the price-to-income ratio of Mumbai’s housing is more than twice that of Delhi’s, almost three times that of Chennai, and almost five times that of Kolkata. The per-square-foot prices of housing are also roughly twice as much as other major cities in India. Bloomberg estimates that Mumbai has the third least affordable housing of large cities globally.

Mumbai’s policies are not particularly unique. Many cities and states in India have rent control policies and stringent restrictions on construction (albeit less so than Mumbai). Instead, Mumbai is the city in which the costs of these restrictions are greatest and most visible, given its high population, economic importance, and unfortunate geography. And if we do not fix Mumbai’s anti-building policies and demonstrate the practicality of doing so now, we may soon find many of India’s large cities in similarly dire straits. 

Source: Jim Herries, AtlasPublisher

We can imagine a variety of policies that may simultaneously allow the city to liberalize, protect tenants from large price shocks, and avoid overcrowding of public amenities. For example, we’ve seen how extra FAR is provided along wider roads and in exchange for additional parking. Robustly increasing the size of these incentives could encourage both development and decongestion at once. Alternatively, first increasing FARs in Mumbai’s wealthiest or least densely populated areas could help redistribute population and allow for an initial test case of the proposal. 

But right now, meaningful debates about the city’s future are derailed in squabbles relevant only to the elite: parking versus parks, limits on profits for builders, or bizarre claims that easing building restrictions will lead to higher prices. But in the status quo, the city lacks housing, parks, and parking. 

The situation is untenable. Even crude solutions — the wholesale end of rent control in two years time, or the blanket tripling of FAR across Mumbai — may be an improvement over the current state. This is not to say that we shouldn’t strive for a more nuanced set of policy prescriptions, but that given the current state of the city’s housing market, we cannot let disagreements over the minutiae of policy become excuses to do nothing. 

  1. Estimates range from 40%–60%.
  2. In India, FAR is also known as floor space index (FSI).
  3. This includes transferable development rights (imagine carbon credits for FAR) and FAR purchased from the city.
  4. For example, the FAR allowances are especially generous for the redevelopment of a contiguous cluster of older buildings that are either especially dilapidated (cessed) or owned by the government. However, as the plan is written, it is especially difficult to interpret whether these buildings receive a maximum FAR allowance of 10, or something like 7.
  5. The development plan of 1964 stated that “Based on these FSIs the Corporation has arrived at a figure of maximum population of 34 lakhs (3.4 million) in the city by 1980.”
  6. Imagine if we applied this principle to San Francisco rents: A one bedroom unit in Pacific Heights that may have rented for $55 a month in 1945 would have that rent held constant until the turn of the century, at which point it would be allowed to increase slowly until it hit roughly $140 in 2022! Meanwhile, actual rents in the neighborhood are currently 20-30 times as much.

Saarthak Gupta is a researcher with a background in economics. He previously lived in Mumbai while working in the global health and development sector.

Published March 2024

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