Urban Studies: Unit 4

Urban economics

Urban economics is a sub-field of economics that refers to the economic analysis of cities, and touches on a
broad range of topics, such as housing, transportation, land use, the cost and benefit of cities and urbanization,
or the provision of local public goods like education.

Why do some cities grow faster than others?

Why do some cities generate more wealth?

Why do some cities decline?

There are no simple or exact answers to this. Urban economics attempt to analyse these questions

The discipline of urban economics is defined by the intersection of geography and economics. Economics
explores the choices people make when resources are limited. Households make choices to maximize their
utility, while firms maximize their profit. Geographers study how things are arranged across space, answering
the question, Where does human activity occur? Urban economics puts economics and geography together,
exploring the geographical or location choices of utility maximizing households and profit-maximizing firms.
Urban economics also identifies inefficiencies in location choices and examines alternative public policies to
promote efficient choices.

Urban economics is that it is a field of study which uses the analytical tools of economics to explain the spatial
and economic organization of cities and to deal with their special economic problems. Urban economics, a sub-
category of regional economics, deals with the regions known as cities and metropolitan areas. Urban
economics concentrates on the economic relationships and processes that contribute to the important spatial
characteristics of urban and regional economies, especially to their size, density of settlement, and structure
and pattern of land use. It provides useful tools to investigate the urban problems and find their solutions.

Urban economics emphasizes: the spatial arrangements of households, firms, and capital in metropolitan areas;
the externalities which arise from the proximity of households and land uses; and the public policy issues which
arise from the interplay of these economic forces. Cities exist because production or consumption advantages
arise from higher densities and spatially concentrated location. After all, spatial competition forces firms and
consumers to pay higher land rents – rents that they would not be willing to pay if spatially concentrated
economic activity did not yield cost savings or utility gains. Economists have long studied the forces leading to
these proximities in location, focusing first and foremost upon the importance of transport costs.

Early models of location deduced that land closer to the market would be devoted to producing crops with
higher transport costs and higher output per acre. Cities in the 19th century at this time were characterized by
high transport costs for both goods and people, and manufactured goods were produced in close proximity to a
central node – a port or a railway from which goods could be exported to world markets.
The high costs of transporting people also meant that workers’ residences were located close to employment
sites. Transport improvements in the late 19th century meant that urban workers could commute cheaply by
streetcar, thereby facilitating the suburbanization of population into areas surrounding the central worksite.
More radical technical change in the first decades of the 20th century greatly reduced the cost of transporting
materials and finished goods. The substitution of the truck for the horse and wagon finally freed production
from locations adjacent to the export node. The introduction of the private auto a decade later further spurred
the decentralization of US metropolitan areas

Axioms of Urban Economics

Production is subject to economies of scale (low cost
production for better income)

Competition generates zero economic profit

Prices adjust to achieve locational equilibrium

Self reinforcing effects generate extreme outcomes

External costs causes inefficiency

The influence of market forces on urban development:

The evolution of cities is influenced by market forces, which are determined by the geographical choices made
by enterprises and households. The characteristics and dynamics of markets are influenced to some extent by
their geographical locations, thereby making market success partially contingent on geography. The market
performance of a business will vary if it is situated in a geographically isolated region compared to a firm located
in a crowded location. Both enterprises and people make geographical decisions that result in the creation of
cities with varying sizes and economic structures. When industries concentrate in a certain geographic
location, such as Silicon Valley in California, they give rise to metropolitan regions characterised by prominent
companies and unique economic systems.

The urban economist examines the site choices made by enterprises and people to understand the factors
influencing the development and size of cities, the drivers of economic growth and decline, and the impact of
local governments on urban expansion. Urban economics focuses on examining the characteristics and
operations of a city's economy. Consequently, the models and approaches created within this area are largely
intended for analysing events that are restricted to the boundaries of a single city.
Understanding the Law of Supply and Demand

The law of supply and demand is a basic economic principle that explains the relationship between supply and
demand for a good or service, and how that interaction affects the price of that good or service.

When there is a high demand for a good or service, its price rises. If there is a large supply of a good or service
but not enough demand for it, the price falls. The reason is that people will bid up the prices when there is
relative scarcity, and there will be unsold items when there is an oversupply.

The theory of supply and demand is one of the most basic principles in economics. Supply and demand work
against each other until the point at which the equilibrium price is achieved—that is the price where supply is
equal to demand in the market. That happens, of course, when all other factors remain equal.

Demand

The law of demand dictates that people will have lower and lower demand for a good as its price rises ever
higher. Similarly, lower prices drive demand, meaning consumers value and purchase something more when it's
cheaper.

Supply

The law of supply says that a higher price will induce producers to supply a higher quantity to the market.
Likewise, when supply is low, prices will rise as people will scramble to buy up scarce resources

Factors Affecting Housing Supply and Demand

The precise values attributed to the supply and demand in a market is not an easy thing to measure in the real
estate market. This is partly because it takes a long time to construct new homes or fix up old ones to put back
onto the market.

Similarly, real estate is not like other industries in that it takes a lot of time to buy and sell homes and other
properties. This means that transactions can take a long time to consummate, making real estate somewhat
illiquid.3

Some of the factors that will influence housing demand include lower interest rates or borrowing costs. When
interest rates are low, people are generally willing to take on more debt because they can afford relatively more
debt for the same monthly outlay. Put differently, they may be able to finance the purchase of a home because
the amount of interest they have to pay is not as burdensome at low rates.

As more buyers enter the market, the demand for housing increases in turn. And if there remains a limited
supply of housing inventory, prices in a low interest rate environment may rise even more.

Meanwhile, the supply of housing is in a constant state of flux. Inventory may increase when people are moving
elsewhere—some may be downsizing, others may try to make more room for an expanding family, and still others
may be purchasing their very first home. Similarly, there may be an increase in development and new home
construction, adding to the existing inventory.

On the other hand, housing inventory sees decreases during times of natural disasters such as floods and
earthquakes, or when existing properties are demolished.4 Land property is also a finite resource, so the
amount of new developments is generally limited.

Housing Acts and policies and its role in housing development at various levels.

National Urban Housing & Habitat Policy (NUHHP), 2007:

The National Urban Housing & Habitat Policy 2007 (NUHHP-2007) has been formulated keeping in view the
changing socio-economic parameters of the urban areas and growing requirement of shelter and related
infrastructure. The Policy seeks to promote various types of public-private partnerships for realizing the goal of
“Affordable Housing for All” with special emphasis on the urban poor. Given the magnitude of the housing
shortage and budgetary constraints of both the Central and State Governments, the NUHHP-2007 focuses the
spotlight on multiple stake-holders namely, the Private Sector, the Cooperative Sector, the Industrial Sector for
labour housing and the Services/ Institutional Sector for employee housing.

Model State Affordable Housing Policy (2015):

The National Housing and Habitat Policy (NUHHP), 2007, with a mandate of providing “Affordable Housing to
All”, envisaged that the States would prepare a State Urban Housing and Habitat Policy and also a State Urban
Housing & Habitat Action Plan. The policy empowers the States to include passing of specific Acts by the States
to achieve the housing policy objectives through institutional, legal & regulatory reforms, fiscal concessions,
financial sector reforms and innovations in the area of resource mobilization for housing and related
infrastructure development including promotion of cost effective building materials and technologies at the
State level.
Draft National Urban Rental Housing Policy (2015):

Urban housing shortage in India, estimated to be 18.78 million during the 12th Plan period with consequent
increases resulting in increase in urbanization in future years, is an area of concern. Historically housing
policy/programmatic interventions have been oriented towards home ownership, nevertheless, providing
housing to all on ownership basis has proved challenging. Growing family needs had resulted in overcrowding
and slum like situations due to lack of alternatives such as rental housing and absence of rental housing
frameworks in the Country. In order to address these issues, the Ministry of Housing and Urban Poverty
Alleviation has come up with the Draft National Urban Rental Housing Policy (NURHP), 2015. The vision of the
Draft Policy is ‘to create a vibrant, sustainable and inclusive rental housing market in India’

The Rajiv Awas Yojana Project (RAY)

The RAY programme aims at creating a slum free India. It was launched in 2011 in two phases. The
“preparatory phase” ended in 2013. The “implementation phase” was sanctioned for action from 2013 to
2022. The two major objectives of RAY can be summed up as follows:
Legal recognition of slums and bringing them into the formal system.
Redress the failures of the formal system The RAY comprises of a series of guidelines that govern the many
aspects of the program, right from the policy measures to be taken to the way in which these measures
must be implemented. For our study, we shall focus only on the policy measures proposed by this scheme.

“Housing For All 2022”

The policies which have been envisaged by the governments over the years have been some modification of
“Housing For All 2022” (HFA) policy (MoHUPA, 2015 that has currently been introduced.
The HFA policy envisages providing, according to the President’s Speech, “every family with a pucca house
with water connection, toilet facilities, 24x7 electricity supply and access”.

Pradhan Mantri Yojna (Gramin)

Pradhan Mantri Awas Yojana – Gramin targets for 2017 has been revised by the central government after
the announcement made by PM Narendra Modi in his 31st December Speech.
The government has increased the overall number of housing units to be constructed by 1 Crore under the
PMAY-G.

Pradhan Mantri Awas Yojana Housing for All (Urban)

The Mission is being implemented during 2015-2022 and provides central assistance to Urban Local Bodies
(ULBs) and other implementing agencies through States/UTs for:

In-situ Rehabilitation of existing slum dwellers using land as a resource

Credit Linked Subsidy
Affordable Housing in Partnership
Subsidy for beneficiary-led individual houses construction/enhancement.
National Housing Policy- Aims and Objectives and its consequences on housing development

National Housing Policy (NHP) In view of various problems faced in relation to housing in independent India, it
became necessary for the government to come out with a comprehensive national policy that clearly spelt out
priorities for promoting a sustained development of housing. The National Housing Policy emphasised in its
preamble that housing is not only a commodity but also a productive investment.

The National Urban Housing & Habitat Policy 2007 seeks to promote various types of public-private
partnerships for realizing the goal of “Affordable Housing For All’ with special emphasis on the urban poor.
The Policy intends to promote sustainable development of habitat in the country with a view to ensuring
equitable supply of land, shelter and services at affordable prices to all sections of society. Given the
magnitude of the housing shortage and budgetary constraints of both the Central and State
Governments, the National Urban Housing and Habitat Policy, 2007 focuses the spotlight on multiple
stake-holders namely, the Private Sector, the Cooperative Sector, the Industrial Sector for labour
housing and the Services/ Institutional Sector for employee housing. In this manner, the Policy will seek
to promote various types of public-private partnerships for realizing the goal of "Affordable Housing for
All".
The formulation of the National Housing Policy is an on-going process which started in 1986. Last time
policy was revised in 1998. Since then there have been major changes in Habitat and Human Settlement
issues. Particularly, the urban housing sector has been facing emerging challenges with regard to
availability of affordable shelter, growth of slums, and gaps in provision of basic services to the urban poor.

Salient features:

Focus of the Policy is on affordable urban housing with special emphasis on the urban poor.
Role of Housing and provision of basic services to the urban poor has been integrated into the objectives
of the Jawaharlal Nehru Urban Renewal Mission (JNNURM).
Special emphasis has been laid on Scheduled Castes / Tribes / Backward Classes / Minorities,
empowerment of Women within the ambit of the urban poor.
The Policy focuses on a symbiotic development of rural and urban areas in line with the objectives of the
74th Constitution Amendment Act.
Within the overarching goal of "Affordable Housing for All," emphasis has been laid on urban planning,
increase supply of land, use of spatial incentives like additional Floor Area Ratio (FAR), Transferable
Development Rights, etc., increased flow of funds, healthy environment, effective solid waste management
and use of renewal sources of energy.
Encouraging integrated townships and Special Economic Zones.
10-15% of land in every new public/private housing projects or 20-25% FAR whichever is greater to be
reserved for EWS/LIG Housing through appropriate spatial incentives.
Private Sector to be permitted land assembly within the purview of Master Plans. Action Plans for urban
slum dwellers and special package for cooperative housing, labour housing and employees housing is to be
prepared.
States to be advised to develop 10 years perspective plan for housing of EWS/LIG.
Policy gives primacy to provision of shelter to urban poor at their present location or near their work place.
Approach will be in-situ slum rehabilitation. Relocation will be considered only in specific cases.
 Micro finance institutions to be promoted at state level to expedite flow of finances to urban poor.
Model municipal laws to be prepared by the Central Government.
Detailed city maps to be prepared based on GIS, aerial survey and ground verification.
Use of proven cost-effective technology and building materials to be encouraged.
Development of mass rapid transit system at sub-regional level envisaged.
Green cover for cities to be encouraged for balanced ecological development.
All States to be encouraged to develop a "Habitat Infrastructure Action Plan" for all cities with a population
of over one lakh.

Objectives

To assist all people, and in particular the houseless, the inadequately housed and the vulnerable sections
and to secure for themselves affordable shelter through access to developed land, building materials,
finance and technology;
To create an enabling environment for housing activity by various sections by eliminating constraints, and
by developing an efficient and equitable system for the delivery of housing inputs;
To expand the provision of infrastructure facilities in rural and urban areas in order to improve the
environment of human settlements, increase the access of poorer households to basic services, and to
increase the supply of developed land for housing;
To undertake, within the overall context of policies for poverty alleviation and employment, steps for
improving the housing situation of the poorest sections and vulnerable groups by direct initiative and
financial support of the State.
To promote a more equal distribution of land and houses in urban and rural areas, and to curb speculation
in land and housing in consonance with macroeconomic policies for efficient and equitable growth.

Goals:

(1) To motivate and help all people and in particular the houseless and the inadequately housed, to secure for
themselves affordable shelter through access to land, materials, technology and finance.

(2) To improve the environment of human settlements with a view to raise the quality of life through the
provision of drinking water, sanitation and other basic services.

(3) The policy envisages priority for promoting access to shelter for the houseless and disadvantaged groups
such as Scheduled Castes.

A new national housing and habitat policy 1998 was formulated and approved during July 1, 1998.

•To facilitate construction of 20 lakh dwelling units each year with more emphasis on the poor. Out of 20 lakh
additional houses, 7 lakh houses would be constructed in urban areas while remaining 13 lakh in rural areas.

•HUDCO is expected to meet more than 55 per cent of the target i.e. 4 lakh units and balance 3 lakh units per
year will be met by other housing financial institutions recognized by the National Housing Bank, Corporate
Sector and Co-operatives.

Housing finance, Policy interventions related to housing finance at different levels.

Housing is the fundamental concern and desire of any human being and this concern is particularly strong in a
developing country like India. This also happens to be the most expensive basic need, to own one’s own house is
not a distant dream anymore. Housing is one of the most basic human needs and is second only to the need for
food and clothing. As such, worldwide housing has been given top priority in policy decisions by progressive
governments. The emergence of a formal institutional system for housing finance has been quite late in India,
with the formation of National Housing Bank (NHB) in 1988. Since then housing is being accorded high priority
by the successive Union Governments.

National Housing Bank (NHB) is the apex financial institution for housing in India, wholly owned by the Reserve
Bank of India. It was established in 1988 under an Act of Parliament. NHB has three main functions viz. to
regulate the housing finance companies, to promote and develop the housing finance market and to provide
financial assistance to housing finance institutions and others. NHB's current focus is on addressing the needs
of the unserved and undeserved. This fact is evident from the various policies of the government, which provide
for many fiscal and monetary measures for promotion of housing investment, higher budgetary outlays for
housing, tax incentives for the housing finance beneficiaries etc. As such, in the on-going reforms era initiated
in the early nineties there has been appreciable growth in institutional housing in India, particularly during the
late 1990s when Commercial Banks (CBs) entered into housing finance arena aggressively.

Housing Finance Companies (HFCs) that once dominated the market as the most prominent group has already
been overtaken by the commercial banks (CBs) - the late-entrants into the formal housing finance market. In
fact, CBs started aggressive lending to the housing sector only since 1998 following a directive from the central
bank of the country viz. Reserve Bank of India (RBI) in 1998 to set aside 3 percent of their incremental deposits
for lending to housing sector. Consequently, prominence of CBs has been on the rise every year and is leading
the market since FY 2003. Conversely, in respect of HFCs as a group, apart from their gradually lowering market
share year after year, there has been significant pressure on their profitability because of the thinning profit
margins arising from competition. This has resulted in many smaller HFCs either getting liquidated, or merged
with their respective parent organizations, particularly so for many of the bank.

Loan Disbursements:

The housing finance market is on a high growth trajectory. Over the last ten years, it has grown exponentially
from Rs.4630 Crores in 1996-97 to an estimated Rs.42000 Crore in 2003-2004; this makes it one of the fastest
growing industries in the country, with a growth rate of over 37% per annum.

Interest Rates

Interest rates came down by over 50% during the seven year span of 1996-97 to 2003-04, from 14% to 7%. The
Eight five year plan envisages housing as the generator of employment, both direct and indirect in the economy.
The plan data states that a 10% increase in investment in housing would lead to 10% increase in employment in
the housing sector giving an employment elasticity of unity. For the entire economy the employment elasticity is
less than half In India, housing data such as “housing starts” and “housing completions” are not available.

Housing Finance and Gross Domestic Product

The contribution of housing to economic development is generally measured in terms of Gross Fixed Capital
Formation (GFCF) in housing, it share in Gross Domestic Product (GDP) and the share of income from housing.
The Gross Fixed Capital Formation at constant prices grew at an annual rate of 3.6% in 1980’s.

Currently less than 4 dwelling units per 1000 of population per annum get constructed in India. However the
UN recommendation for developing countries is of 8 to 10 dwelling units per 1000 per annum in the next 20-30
years to arrest the deterioration of housing situation.

Land is not available to housing due to restrictions placed on conversion of agricultural land to non-agricultural
land. The land prices in Bombay, Calcutta and Delhi are more than those in the western cities like London and
Washington D.C. In fact, in the prevailing market rates for housing in Bombay, at Rs. 400 per square feet to Rs.
20,000 per square feet, 97% constitutes the cost of land and 3% the cost of construction.

Boost to housing can rejuvenate the economy. Housing has maximum propensity to generate income and
demand for materials, equipment and services. Funds allocated to shelter return in the shape of income and
demand to other sectors

Housing finance institutions.

The Central Government had, with effect from August 09, 2019, transferred regulatory powers of the Housing
Finance Companies (“HFCs”) from the National Housing Bank (“NHB”) to the Reserve Bank of India (“RBI”). It is
further stated that the RBI will review the extant of regulatory framework applicable to HFCs and issue the
same in due course. Until such time, HFCs were required to comply with the directions and instructions issued
by NHB.

The RBI now proposes to define ‘housing finance’ or ‘providing finance for housing’ as:

“Financing, for purchase/ construction/ reconstruction/ renovation/ repairs of residential dwelling units,
which includes:

Loans to individuals or group of individuals including co-operative societies for construction/ purchase of
new dwelling units.
Loans to individuals for purchase of old dwelling units.
Loans to individuals for purchasing old/ new dwelling units by mortgaging existing dwelling units.
Loans to individuals for purchase of plots for construction of residential dwelling units provided a
declaration is obtained from the borrower that he intends to construct a house on the plot within a period
of three years from the date of availing of the loan.
Loans to individuals for renovation/ reconstruction of existing dwelling units.
Lending to public agencies including state housing boards for construction of residential dwelling units.
Loans to corporates/ Government agencies (through loans for employee housing).
Loans for construction of educational, health, social, cultural or other institutions/centres, which are part
of housing project in the same complex and which are necessary for the development of settlements or
townships;
Loans for construction of houses and related infrastructure within the same area, meant for improving
the conditions in slum areas for which credit may be extended directly to the slum-dwellers on the
guarantee of the Government, or indirectly to them through the State Governments;
Loans given for slum improvement schemes to be implemented by Slum Clearance Boards and other
public agencies;
Lending to builders for construction of residential dwelling units.”

Housing Finance Institutions In India

i. Housing and Urban Development Corporation (HUDCO)

Housing & Urban Development Corporation Ltd. (HUDCO) is a public sector company fully owned by Govt.
of India for financing of housing and urban infrastructure activities in India.
HUDCO was incorporated on April 25, 1970 under the Companies Act 1956. The cardinal objective of
HUDCO is to undertake housing and urban infrastructure development programmes in the country,
provide long-term finance for construction of houses for residential purposes in urban & rural areas and
finance or undertake, the setting up of the new or satellite towns and industrial enterprise for building
material.
It mobilizes financial resources from institutional agencies like LIC, GIC, UTI, commercial banks,
international assistance as well as through public deposits.
ii. National Housing Bank:
The National Housing Bank (NHB) is a state owned bank and regulation authority in India, created on July
8, 1988. It is owned by the Reserve Bank of India, was established to promote private real estate
acquisition.
NHB has been established with an objective to operate as a principal agency to promote housing finance
institutions both at local and regional levels and to provide financial and other support incidental to such
institutions and for matters connected therewith.
Apart from the premier institutions like Housing Development Finance Corporation Ltd (HDFC) and LIC
Housing Finance Ltd, it extends support to other housing finance institutions like Can-Fin Homes Ltd, GIC
Grih Vitta Ltd., SBI Home Finance Ltd., etc. who extends housing loans to individuals and group housing
schemes.
Reserve Bank of India gives directives to different private sector banks as well as public housing finance
companies for Home Loans.
iii. Housing Development Finance Corporation:
HDFC is a unique example of a housing finance company which has demonstrated the viability of market-
oriented housing finance in a developing country.
It is viewed as an innovative institution and a market leader in the housing finance sector in India. The
World Bank considers HDFC a model private sector housing finance company in developing countries and
a provider of technical assistance for new and existing institutions, in India and abroad.
The HDFC advances housing loans to individuals for (a) buying or constructing houses, (b) extension or
improvement of existing houses, (c) acquiring a self-contained flat in an existing or proposed cooperative
society/ apartment owners association and (d) independent bungalow / row house.
Loan can be availed of up to a maximum of 85% of the cost of the property including the cost of land.
The maximum loan to an individual can be Rs. 25 Lakh.
Although the equated monthly installment of repayment is over 15 year’s period, the repayment does not
ordinarily extend beyond the age of retirement or 65 years of age of the borrower, whichever is earlier.
iv. Insurance organizations / corporations
The Life Insurance Corporation (LIC) and Group Insurance Corporation (GIC) support housing activity
both directly and indirectly.
The LIC promoted a subsidiary for the purpose, namely the LIC Home Finance Ltd.
The GIC supports housing almost exclusively indirectly by subscribing to bonds/debentures floated by the
HUDCO and state housing boards.
A housing finance subsidiary called the GIC Housing Finance Ltd., in July1990 to enable it to lend directly
to individuals.
v. Specialized Housing Finance Institutions
There are certain institutions termed as ‘Specialized HFI’, which cater only to the needs of the housing
sector.
They can further be classified as housing finance companies promoted in the public / private / joint
sectors and cooperative housing finance societies.
A lead player in Housing Finance Company (HFC) category is the HDFC Ltd. It lends, mainly for new
residential housing to individuals, groups of individuals, and individual members of cooperative societies.
Besides the HDFC, a number of HFCs have been sponsored by banks such as SBI Home Finance Ltd, Canfin
Homes Ltd, IndBank Housing Finance Ltd, Citihomes, Vijaya Home Loans etc.
vi. Commercial banks:
Commercial bank lending to individuals for housing emerged in the wake of the report of the working
group on ‘Role of Banking System in Providing Finance for Housing Schemes’.
They have been lending to the housing-sector based on annual credit allocations made by the RBI.
vii. Cooperative banks:
The cooperative banking sector consists of State Cooperative Banks, district central cooperative banks
and primary urban cooperative banks.
Cooperative banks finance individuals, cooperative group housing societies, housing boards and others
who undertake housing projects for Economically Weaker Sections (EWS), Lower Income Group (LIG) and
Middle Income Group (MIG).
viii. Commercial and Corporate Banks:
Home Finance wings of Commercial and Corporate Banks provide housing finance to individuals,
corporate bodies and promoters and developers.