Thoughts on affordable housing XIII

This is the latest in the series on affordable housing. Affordable housing supply is arguably one of the top policy challenges facing cities across the world. 

This graphic by John Burn-Murdoch is a good illustration. 

Here’s more evidence.

Home prices have risen more than 50 percent since the pandemic. About a third of Americans households now spend more than 30 percent of their income on housing. In 2014, the median age of a first-time home buyer was 31. In 2025, it was 40 — the highest on record.

Burn-Murdoch also points to research that links some of the commonly observed GenZ behaviours (like not making an effort or splurging on luxuries) to the housing affordability problem. 

In a pioneering study published last week, economists at the University of Chicago and Northwestern University used detailed data on the card transactions, wealth and attitudes of Americans to demonstrate that reduced work effort, increased leisure spending and investment in risky financial assets (including crypto) are all disproportionately common among young adults who face little to no realistic prospect of being able to afford a house. By contrast, Seung Hyeong Lee and Younggeun Yoo’s research finds that those for whom home ownership is a more realistic possibility in the medium term, or who have already attained it, take fewer risks and strive harder at work. 

I have extended their analysis to the UK and find a similar picture. Young British renters who have little hope of cobbling together a deposit are much more likely to take financial risks — with online betting, for example — than their contemporaries who are on or within reach of the housing ladder… Lee and Yoo use time series data and local house prices to show that the link between unaffordable housing and economic behaviour appears to be causal. Recent upticks in financial risk-taking, leisure spending and reduction in work effort respond to changing economic incentives. As housing affordability deteriorates, those who come to believe they are locked out of home ownership resort to a mixture of high-risk bets and what US economic commentator Demetri Kofinas calls “financial nihilism” — why strive and save when it won’t be enough to make it anyway? — while their better-placed counterparts tighten their belts.

Fundamentally, as Ezra Klein points out with this graphic, the housing affordability problem is a housing supply problem. 

In 2025, America built fewer homes per 100,000 people than it did in 2005, 1995, 1985 or 1975.

Housing supply in the US has slipped into the negative territory since 2017. 

Governments in cities across the world have been exploring various approaches to address the housing affordability crisis. I have blogged about several of them in my earlier posts on the issue. 

The report by the Centre for American Progress, linked in the above article, offers a three-pronged plan: take down barriers that make it harder to build homes; build more affordable homes at a lower cost; and protect consumers and lower other housing costs. It seeks to address the problem of opposition to house-building in high-cost/rent areas by paying people living in such areas if their areas build more housing. Klein writes,

Places with a housing shortage — and that’s a lot of them — get a choice. Build the housing and the federal government will give all the renters in the city up to $1,000 off their rent — or don’t build the housing and lose access to certain federal grants. The Searchlight Institute, a new Democratic think tank, recently proposed a similar idea. In that version, cities and other places that hit ambitious housing targets would qualify for a federal rebate that would give every household — so both homeowners and renters — a check equal to the average increase in rent over the last year. In other words, build enough housing and the federal government will give the people who live near that housing money…

The other proposal is to lower housing construction cost

Between 1950 and 2020, productivity in the manufacturing sector — how much you could produce with the same number of workers — rose by more than 900 percent. That’s a big part of why everything from tables to televisions are cheaper today than they were decades ago. But over the same period, productivity in the construction sector has fallen… But you can manufacture housing — constructing homes in an off-site factory much the way we construct cars and then shipping them for final assembly. This is technology pioneered in the United States when George Romney, Mitt Romney’s father, served as secretary of housing and urban development during the Nixon administration. But the United States never figured out the rules nor the financing to make an industry out of it. Instead, it’s taken hold elsewhere. In Sweden, for example, more than 40 percent of new homes — and more than 80 percent of single-family homes — are fabricated off-site.

The Center for American Progress’s plan proposes a slew of projects to take this industry America invented and make it one where America is a leader. They want the government to seed a major research program to fund innovation in housing construction. They want to have the federal government leverage its purchasing power to become an initial buyer for modular housing — one idea here would be to have the Department of Defense upgrade its military base housing using modular construction. They want to modernize building codes to make modular easier — removing, for instance, an outdated federal requirement to attach a permanent steel chassis to all modular construction — and updating federal insurance and financing rules to make sure modular production qualifies.

A longstanding problem with urban planning in the US and the UK is the discretion allowed to local communities and planners in planning decisions. This has spawned NIBYism trends in the guise of conditions spanning environmental protection, preservation of historical areas, energy efficiency considerations, etc. Sample this illustration from the UK by Sam Dumitriu. 

A fourteen-flat development in Walthamstow, less than 10 minutes walk from the Victoria Line, required a 1,250 page planning application. Its developers produced more than 70 separate documents and still have waited over a year for a decision from the local authority. This isn’t just a Walthamstow problem either. One SME housebuilder recently revealed that Croydon required them to produce over forty separate validation documents to get planning permission. In the PM’s backyard, Camden, a major brownfield development was delayed because planners were not satisfied that the project was ‘exemplary’ in terms of ‘the circular economy and whole life carbon impacts’. In Cambridge, one of the most unaffordable parts of Britain, all new developments (10 units or more) must spend at least 1 per cent of their capital costs on public art.

The UK, under the Labour government, has been exploring various policy proposals to ease zoning regulations and promote densification to increase housing supply. The Chancellor Rachel Reeves has announced the Brownfield Passport, which would make “yes” the default answer for new denser housing on previously developed land. However, its success would depend on the details of implementation. Dumitriu writes that the Levelling Up and Regeneration Act (LURA) contains the power to create National Development Management Policies (NDMPs), which could declare basic standards for embedded carbon, flood protection, access to light, etc., to supersede any local planning policies. However, its effectiveness could be blunted by the non-binding nature of NDMPs. Another proposal by the Labour Government is the New Towns policy to develop new greenfield towns. 

California has been experiencing a serious housing affordability crisis, largely due to restrictive housing development norms like this.

Land is expensive, labor is expensive and NIMBYism — the not-in-my-backyard sentiment that exists everywhere — is particularly strong. The city’s zoning rules discourage projects that are tall and bulky and that might anger the owners of single-family houses nearby. Five stories is the tallest allowable height for a multifamily residential building — and those are permitted on only a few blocks of the city.

In early October, California took a major step to address this problem when the state legislature approved Senate Bill 79 (SB79) that overrides local zoning laws to promote transit-oriented development through higher-density housing. It allows developers to build up to nine storeys high within a half-mile of major public transit stops. The law would be phased in gradually, taking full effect by the start of 2030. 

In brief, the law would prevent local communities from blocking new mid-rise housing in well-connected locations under the cover of community review, environmental safeguards, etc. It expedites approvals by imposing strict timelines and penalties on the cities for non-compliance with its provisions. This is a good primer. 

California is emulating reforms that have been undertaken far away in New Zealand. The country has emerged as a pioneer in urban planning reform. In 2016, the city of Auckland upzoned three-quarters of its residential land through the Auckland Unitary Plan to allow dense development near transport by-right, which kept rents 30% lower than the counterfactual. The reform was rolled out nationwide, and New Zealand has seen a construction boom. The new Housing Minister, Chris Bishop, is taking the policy even further and removing anti-supply red tape.

The evolution of zoning regulations

As Edward Glaeser wrote in his classic Triumph of the City, urbanisation is arguably the greatest economic growth-creator in history. Zoning regulations and their trends have been central to the idea of urbanisation and the quality and nature of urban growth. 

In the latest edition of Works in Progress, Samuel Hughes has a fascinating account of the downzoning movement that gripped western cities, specifically their suburbs, since the turn of the 20th century. 

In 1890, most continental European cities allowed between five and ten storeys to be built anywhere. In the British Empire and the United States, the authorities generally imposed no height limits at all. Detailed fire safety rules had existed for centuries, but development control systems were otherwise highly permissive. Over the following half century, these liberties disappeared in nearly all Western countries. I call this process ‘the Great Downzoning’. The Great Downzoning is the main cause of the housing shortages that afflict the great cities of the West today, with baleful consequences for health, family formation, the environment, and economic growth… The Downzoning is one of the most profound and important events in modern economic history…

The Downzoning was extremely pervasive in existing suburbs, where it tended to raise property values by prohibiting kinds of development that were seen as undesirable… The general pattern is that the Great Downzoning was driven by interests more than by ideology. The Downzoning happened where it served the perceived interests of property owners, and failed to happen where it did not… in the great cities of the West, the housing shortage that the Downzoning has created may prove to be its un­doing. Anti-density rules now reduce property values in these places rather than increasing them, and there is growing evidence that property owners opt out of such rules when they have the opportunity to do so.

In European cities before the 19th century, the elites were concentrated in city centres, with suburbs being unplanned and impoverished. In fact, the city centres were fortified to physically cut them off from their suburbs. Low-density suburbs started emerging in some cities when developers began developing entire suburban neighbourhoods. Thanks to rising urbanisation, growth of capital markets, better roads, arrival of suburban railways, buses, and trams, improved policing, reform of feudal land tenures, and the demolition of city walls, suburban growth took off globally in the 19th century. The broad shape of development control regulations emerged in the form of privately enforced covenants.

Suburb developers tried to safeguard neighborhood character through imposing covenants. This episode forms a fascinating prequel to the Great Downzoning, so much so that we might think of it as a ‘First Downzoning’ or ‘Proto-Downzoning’. A covenant is a kind of legal agreement in which the homebuyer agrees to various restrictions on what they can do to their new property. Covenants generally forbade nearly all non-residential uses, as well as forbidding subdivision into bedsits or flats. They frequently imposed minimum sales prices, and in the United States, they often excluded sale or letting to non-white people. In all countries, they often included explicit restrictions on built density. Most covenants were intended to ‘run with the land’, binding not only the initial buyer but all subsequent ones too… They were used in all English-speaking countries, and similar mechanisms existed in France (servitudes in cahiers des charges), Germany (Grunddienstbarkeiten), the Low Countries (erfdienstbaarheden), and elsewhere (e.g. Italy, Spain, Scandinavia)… 

Covenants became more elaborate over time, and by the early twentieth century they sometimes included provisions on such matters as where laundry could be hung and what colours joinery could be painted in. Developers would not have imposed covenants if they had not expected them to increase the value of neighborhoods, so their pervasiveness reveals a widespread demand for development control among nineteenth-century people. But they were not very effective. One problem concerned whether courts would enforce them… Covenants fall under private law: breaking one is not a crime, and the state will not prosecute it. Enforcement thus requires a private lawsuit, which was and is expensive… To secure the development in perpetuity, covenants had to apply not only to the initial homebuyer, but to all future ones – people with whom the developer would never have any direct dealings, and who might indeed live long after the developer’s death… The upshot of all this was that covenants were usually a weak kind of development control, which disintegrated upon contact with serious demand for densification.

The adoption of zoning regulations by public authorities began in the final years of the 19th century in Germany and Austria-Hungary

The key innovation was ‘differential area zoning’, whereby different areas within a given jurisdiction were subjected to different building restrictions… After a couple of decades of experimentation, the 1891 Frankfurt zoning code caught the imagination of municipal governments across Central Europe. It was swiftly emulated. By 1914 every German city had a zoning code, and many had gone through multiple iterations, usually with progressively lower densities. In existing elite suburbs, these zoning codes tended to effectively duplicate the content of developers’ covenants, but because they had a stronger legal basis and were enforced by the state, they were far more effective… Virtually every wealthy suburb that existed in 1914 retains its suburban character today… 

The example of Germany and Austria was quickly followed abroad. The Netherlands introduced a kind of zoning system in 1901. Italian cities began to follow suit before the First World War. Japan began to introduce a zoning system nationally in 1919, albeit one that continued to permit fairly high densities. Poland introduced a national system in 1928. American and Canadian cities started introducing zoning systems in the 1910s, which became widespread in the course of the interwar period. Zoning provisions began to be introduced in interwar Australia and were consolidated in the 1940s. Britain and France followed relatively late… and robust national systems were not introduced in either country until the 1940s. In broad terms, the Great Downzoning was in place by the 1950s, though density restrictions continued to be tightened in the following decades in many countries.

The emergence of the downzoning movement benefited from a confluence of factors. It coincided with rapid urbanisation that had created squalor and unhygienic conditions in urban neighbourhoods. Public health systems failed to keep up with the urban growth. Among large elite groups, cities continued to be seen as parasites on the rural producing areas. Commoners and planners saw lowering density as the solution, with the latter proposing no more than 12 dwellings per acre. Governments stepped in to support urban diffusion (through lower density) by subsidising public transport, restricting mortgage subsidies to lower densities, creating common spaces and gardens, and so on. Amidst all these, as mentioned above, zoning regulations emerged to sanctify downzoning. 

Perhaps the most important reason for the success of the downzoning movement was that it did not have the legacy of zoned suburbs with their powerful, entrenched interests to overcome. Most importantly, the zoning regulations increased land values by formalising development control in those areas. In other words, the downzoning movement was the emergence of the zoning regulations themselves, starting with low-density. 

The only real downzoning requirement was on greenfield land, where the zoning regulations sought to suppress density. However, in these areas, the landowners and developers opposed and overcame restrictive zoning regulations. This was especially pronounced in Southern Europe - Spain, Portugal, Italy, and Greece. In all these places, densities started falling only in the late 20th century, on the back of market forces. In Germany and France, too, greenfield developments continued to have higher densities.

Hughes points to an important takeaway about the downzoning movement.

We are confronted, then, with a striking contrast: nearly total success in downzoning existing suburbs, and nearly total failure in downzoning greenfield development. This contrast casts doubt on the idea that the down­zoning was driven by the will of planning elites. Another context in which planners struggled to lower or even cap densities was in city centers. Many American city centers declined in the decades after the Second World War due to rising crime and traffic congestion, while densification was prevented in some European centers by architectural conservation laws. But in places where neither of these factors applied, densification of city centers continued apace, reaching some of the highest floorspace densities ever attained. Many Australian and Canadian cities are particularly clear examples of this, though there are also cases elsewhere. Again, this is puzzling for the ideas-driven theory of the Great Downzoning: in places which lacked an owner- occupier lobby for restrictions on densification, planning ideology seems to have been ineffective.

Since the middle of the century, as urbanisation has progressed, there has been a shift towards higher densities. Hughes points to the paradox of the favourable views on densification among officials co-existing with lower density views among the current landowners. 

From the 1960s onwards, the intellectual tide began to turn in favor of density, and by the 1990s, density was wildly fashionable again… Every planning school in Britain teaches its students the importance of density, walkability, and mixed use… There have been huge increases in the populationof virtually every British city centre since the 1990s, enabled and fostered by a range of public programmes… virtually none of this increase has taken place in private suburbs. Instead, it has been concentrated in former industrial or logistics sites, in city-centre commercial areas, or in social housing, which the authorities regularly demolish and rebuild at greater densities. Towns without much of this, like Oxford and Cambridge, have stable or even declining populations in their city centres…

All over the West, urban density is valued by planners and officials. Governments pursue it, and have had some success in enabling it in industrial and commercial areas and through the redevelopment of public housing. In the United States, densification is the central theme of a vast YIMBY movement. But progress on densifying owner-occupier suburbs has been extremely limited, and the vast suburbs of the nineteenth and twentieth centuries remain almost untouched. The unified opinion of the planning and policy elites has proved ineffective in the face of homeowner opposition. If the idealist theory were the whole truth, and the Downzoning was purely the creation of planners, this would be extremely strange.

The article points to the general preference for lower densities among households.

When people buy a home, they care not only about the home itself, but about the neighborhood in which it stands. This was why nineteenth-century developers started building whole villa colonies and streetcar suburbs rather than just individual houses… All else being equal, many people prefer neighborhoods built at low densities. Some of the perceived advantages of low density will apply virtually anywhere, like quieter nights, greener streets, more and larger private gardens, and greater scope for social exclusivity. Other attractions are more specific to certain contexts. Where urban pollution is bad, people seek suburbs for cleaner air. Where crime is high, suburbs are often seen as a way of securing greater safety. In eras with high levels of racism and increasing racial diversity, people moved to suburbs to secure racial homogeneity. Restrictions on densification were a way of preserving these ‘neighborhood goods’ in perpetuity. The prevalence of covenanting constitutes extremely strong evidence that suburban people wanted this. Covenants were imposed by developers, whose only interest was in maximizing sales value. They judged that the average homebuyer valued the neighborhood goods that covenants safeguarded more than they valued the development rights that covenants removed. 

But such a preference must also be seen against the increased value extraction from properties due to upzoning.

For example, residents of the London neighborhood South Tottenham recently persuaded their local councils to let them double the height of their houses. All properties in the neighborhood enjoyed an immediate boost in value once the council agreed. In South Korea, some neighborhoods are allowed to vote for much larger increases in development rights. This generates abundant value uplift, as a result of which residents of such neighborhoods nearly always vote in favor. In Israel, apartment dwellers can vote to upzone their building: this has proved so popular that half of the country’s new housing supply is now generated this way.

Hughes makes the point that while initially, downzoning was attractive since “the neighbourhood goods it secured were more valuable than the floorspace it precluded”, but as cities developed and property prices rose, “the development rights lost through density controls to retain neighbourhood values became steadily more valuable”. 

Making the principled case for density is useful, but unlikely to be sufficient: principled argument did not make the Downzoning, and it probably won’t unmake it either. Instead, campaigners should consider ways in which the changing structure of homeowners’ interests can be mobilized in the cause of reform. The examples of South Tottenham, Seoul, and Tel Aviv suggest that homeowners may be vigorous in pursuit of upzoning when they realize how much they stand to benefit from it. There is no reason why this could not be replicated elsewhere.

This utilitarian and instrumental view of zoning regulations contrasts with the argument that they emerge from ideological principles. 

In this regard, the trajectory of the downzoning trend may be typical of the many large systems that we see in our lives. 

These systems have unregulated (or less regulated) and disorderly beginnings. With time, people mobilise coalitions to formulate norms and then rules to bring order to the system. This creates value and attracts more interest and people to the system. Most often, the lead in this process is taken by an emerging class of beneficiaries from the dynamics triggered by the unregulated system. In due course, these winners will find ways to entrench themselves. They will seek to perpetuate and tighten the rules, in the process further benefiting themselves (and excluding others). 

This equilibrium gets upended only when either the benefits of switching to another set of rules become more attractive for the winners, or the coalition of those adversely impacted by the rules gains the upper hand over the incumbent winners, or the social costs become egregiously prohibitive. If either (or a combination) happens, it triggers a competing dynamic that creates a new set of rules. These rules invariably promote the interests of the competing group and create a new set of winners. 

In the case of zoning, regulation (and downzoning) allows the landowners to create neighbourhood goods that increase the value of their properties, and then appropriate all the value by opposing any proposal that would expand supply. The localised nature of decision-making on zoning regulations promoted the NIMBY movement. This persists till the property prices rise so high that building more on the same land becomes financially more attractive. 

In some ways, this is the dynamic of any kind of regulation, from occupational to industrial licensing, restrictions on capital to trade, protection of the environment to labour, financial markets to infrastructure sectors, and so on. They start with good intentions to address a felt need, only to gradually become captive to vested interests, who are generally the early beneficiaries of the regulations. 

This trajectory of evolution is also true of new technologies, which tend to flourish in conditions of light-touch regulation. As the technology grows, and especially with those which have network effects, the early movers develop large moats and resist any regulation that dilutes their head start. 

All these are classic market failures, and demand public policy action. In the case of zoning regulations, it becomes essential for central (or provincial) governments to step in and mandate regulations that seek to correct the failures and expand supply. The recently passed California SB 79 Act, which overrides restrictive local zoning limits to set new zoning limits that aim to expand housing supply, is a good example.

In the cities of developing countries like India, high-density urban development is associated with slums, poor quality of infrastructure, and generally stressed carrying capacity of the locality. This experience, reinforced by the prevailing trends and theories from the West about low-density suburban growth, has led planners in these countries to deeply internalise the belief that upzoning is detrimental. They, and their influence on the bureaucrats and politicians, are perhaps the biggest obstacles to upzoning in these countries.

The strength of the argument that affordable housing is constrained by restrictive zoning regulations is diffused by other demands for lower taxes and fees on land and construction, lower cost of capital for real estate, release of vacant government lands, and so on. Besides, the sprawl has come to be accepted as a norm. All these come in the way of radical reforms to zoning regulations that appear all too logical. 

Weekend reading links

1. Beneficiaries of George Soros and his Open Foundation.

Among the beneficiaries is Hungary’s Viktor Orbán whose Oxford scholarship was paid by Soros in 1989. Talk about no good deed going unpunished. Another kind of beneficiary is Scott Bessent, the US Treasury secretary, who ran Soros’s hedge fund for many years. Soros was the anchor $2bn investor in Bessent’s own hedge fund, Key Square Group, in 2015.

2. Chinese companies produce many AI tech components.

3. Yogendra Yadav reviews Partha Chatterjee's new book, For a Just Republic: The People of India and the State. 

4. The US tariffs latest update.

5. India's IT industry facts of the day

The top five Indian IT firms had free cash flows of nearly $13bn in the 2023-24 financial year, according to HFS Research. And Infosys said on September 11 it had approved a $2bn share buyback offer — a week before the Trump order. Yet the R&D to sales ratio for India’s IT industry is abysmal: 0.88 per cent on average, according to a 2024 report by India’s Ministry of Corporate Affairs.

6. China moves to restrict Ericsson and Nokia equipment in their telecom networks. 

Chinese state-backed buyers of IT equipment — which include mobile network operators, utilities and other industries — have begun more closely analysing and policing foreign bids. That process has required contracts by Sweden’s Ericsson and Finland’s Nokia to be submitted for “black box” national security reviews by the Cyberspace Administration of China where the companies are not told how their gear is assessed. The reviews by the powerful tech watchdog can stretch three months or longer. Even in cases where the European groups ultimately secure approval, the lengthy and uncertain audits often leave them at a disadvantage to Chinese rivals that face no such scrutiny, the people said... Beijing’s growing sales restrictions have collapsed Ericsson’s and Nokia’s combined market share in China’s mobile telecoms networks to about 4 per cent last year from 12 per cent in 2020.

Amidst these moves, Europeans have been half-hearted in their efforts to restrict Huawei and ZTE. 

Huawei and ZTE have retained 30 to 35 per cent of the European mobile infrastructure market, down only 5 to 10 percentage points from 2020, data from Dell’Oro Group shows. Germany has 59 per cent of installed 5G gear sourced from Chinese groups, according to John Strand of Strand Consult, even though the country plans to phase out high risk Chinese vendors by 2029.

7. FT writes on the wealth of the super-rich

When Forbes magazine released its first global billionaires list in 1987, just 140 names appeared on it. The 2025 version featured more than 3,000 people, worth a collective $16tn. Even allowing for factors such as the rise of China and over three decades of inflation, it is a staggering increase in both numbers and values; the net worth of Elon Musk, judged the world’s richest person in April 2025, was estimated at $342bn — compared with $295bn for the entire class of 1987. Globally, the average wealth of the top 0.0001 per cent of the population grew on average 7.1 per cent a year between 1987 and 2024, compared to 3.2 per cent for the average adult, according to Gabriel Zucman, a professor of economics at the Paris School of Economics and at the University of California, Berkeley... The top 400 wealthiest Americans had a total effective tax rate of 23.8 per cent of income in the years from 2018 to 2020, including individual income taxes, estate and gift taxes, and corporate taxes. In comparison, the rate for the wider US population was 30 per cent, rising to 45 per cent for the highest-earning workers.

Historically, asset-based taxes were the main revenue source for governments. Taxes on income in the UK, for example, were a mid to late-20th century phenomenon closely tied to the emergence of a welfare state. Now, as demographics worsen (with fewer worker and more retired people), the case for wealth taxes is becoming more compelling. 

8. How housing prices in the UK have changed over the last 35 years. 

9. GCCs are cannibalising the business of India's IT services firms.

As GCCs grow, they are eating into the pie of IT services majors, both in terms of business and skilled talent... Out of the 200,000 tech roles in India in FY25, approximately 120,000 were in GCCs, with a 10–15% year-on-year growth, said Vikram Ahuja, co-founder of ANSR, a GCC solutions platform... The real evolution started with traditional companies coming in to set up true capability centres, like [department-store chain] JCPenney, [luxury-superstore chain] Saks Fifth Avenue, [lingerie retailer] Victoria’s Secret…They have no business to be experimenting with this concept. All airlines, hotel chains, car-rental companies are coming. So, it’s become industry agnostic. On the contrary, the more low-tech and the more traditional you are, the more the need [for a GCC]... Lloyds has hired over 2,500 engineers in Hyderabad within 14 months, with 95% focused on tech. At Barclays’ India operations, two–thirds of its tech workforce is now in-house—a stark jump from just about 33% a decade ago. Even Indian lenders are following suit. Just six months ago, RBL Bank achieved a 60:40 split between in-house and outsourced tech talent—a significant leap from the 35:65 ratio of a few years ago.

A major reason for the exit is the low and stagnant wages paid by IT services firms, even as the scope of work expands. 

9. Private equity is taking over India's IB and IGCSE school chains. And results are not good.

Private equity firms are betting big on Indian education, and their playbook mirrors a Western model—optimised for cost control, standardised for scale-up, and centralised for effective management... Both CBSE and state-board campuses face tighter fee caps and myriad state-level approvals. International boards like International Baccalaureate (IB) and Cambridge have a wider fee latitude and can levy “development” charges, creating room for upgrades and margins. The model makes money within India’s nonprofit rulebook. The school usually sits in a Section-8 entity to satisfy K–12 regulations. A for-profit services arm—typically charging 10–15% of school revenue through the likes of management fees, royalties, and infrastructure leases—operates on the side... 

Investors like GSF fall back on the same approach with each school: centralise leadership, trim excess, introduce standardised systems, and make visible infrastructure upgrades. But beneath the surface, the effects of this strategy vary sharply... While fee hikes have remained within the standard 5–10% range at premium schools like Sancta Maria (Rs 7–8 lakh in annual fees)—already operating near permissible ceilings—some lower-fee campuses could see steeper increases... Infrastructure investment varies significantly by operator and campus... The international school Manthan in Hyderabad saw 60–70% staff attrition after a 100% ISP acquisition... At TIPS Coimbatore, acquired by Globeducate, 20% of the staff left after the founder exited... Student numbers, too, fell by nearly a fifth at Glendale and Oakridge in the years after their acquisition... Pre-acquisition pay rises of 8–15% have been slashed to 2–7% under new management—standard practice in the West, but a sharp adjustment in Indian schools... The result: well-trained, experienced teachers leave, and classroom quality drops... The same Western-school playbook that made these operators successful abroad doesn’t map cleanly onto India’s hyper-competitive, founder-led education landscape.

Thoughts on Affordable Housing XII

Social rental housing is a significant share of the total housing stock across many European cities. The OECD data puts the share at 8% for the EU as a whole, 34% for the Netherlands, 24% for Austria, 16% for the UK, 14% for France, and 3% for Germany.

Paris, under its Socialist mayor, Anne Hidalgo, is making efforts to buy land and expand its social housing stock to 40% of primary residences by 2035. About 30% will go to people with no or very low incomes, and 10% for those on middle incomes. And it’s a radical plan.

To get there, the city government led by Socialist mayor Anne Hidalgo is expanding its arsenal of interventionist tools that it casts as the only way to correct market failings, especially those wrought by short-term tourist rentals and vacant apartments. Paris is also doing more “pre-emption deals” in which it blocks a planned real estate transaction to instead buy the building itself to convert into social housing. Under its new land use plan, the city has labelled some 800 buildings, one-third offices, as candidates for expropriation. Developers must also include a significantly higher proportion of social housing — half in cities deemed in “hyper-deficit” — in all new-builds. Even office owners are now required to add social housing units when they build or do major renovations…

In Paris, the lack of buildable space, prohibitions on building height, and historical protection rules make it difficult for any developer to build new housing. Private companies and institutional investors have largely been scared off by rent controls, poor yields and rental bans that are slowly being phased in on homes with poor energy efficiency. For these reasons, converting existing structures like offices, car parks and government-owned buildings into new housing has been a welcome solution. Paris is also putting pressure on rich areas, such as the 6th, 7th and 16th arrondissements where the proportion of state-subsided housing ranges from 2 to 7 per cent, compared with 42 per cent in the poorer 19th and 20th arrondissements…Paris has recently set an annual housing budget of around €800mn a year, nearly double that of five years ago, and four times the amount budgeted by the central government.

Sample this illustrative example of how these efforts work.

The car park conversion on rue Nollet in the 17th arrondissement is one of about 40 such projects the city has undertaken, which also dovetails with its efforts to reduce cars in Paris. The city paid for more than a third of the €12.3mn cost with the rest coming from 40- to 50-year-long state-backed loans, without which the conversion would not be economically viable. The agency that built and will operate the building under contract for the state expects a roughly 40-year payback time, far longer than commercial developers would accept.

Paris is part of the French government’s efforts to promote social housing,

In 2000, the government enacted a law, known as the SRU, which required many cities and towns to reach 20 to 25 per cent social housing by 2025. The criteria were set to spare very small towns, but some mayors still think they are too rigid. In addition to billions of euros in government subsidies, the pivotal player has been the Caisse des Depots, a state-owned financial institution, that provides roughly two-thirds of the funding to build. The money for these long-term guaranteed loans comes from the popular regulated savings account called the Livret A, in which most French citizens invest. 

European countries have traditionally pursued policies that favoured the development of social housing units.

Places like the Netherlands and Austria, which have century-old systems that have relied on government-owned developments and non-profit housing associations, have also intervened more in the market than places like the UK or Germany where a bigger role is given to commercial developers… In the UK, after a wave of postwar construction, much of the council housing stock was sold off to the residents in “right to buy” schemes starting in the 1980s. The country now largely relies on a requirement for developers to add affordable units in new-builds, with a typical request in London of a minimum of 35 per cent. But developers can also do less by instead building public facilities like parks or municipal pools…

Vienna and Amsterdam are among the cities that have gone the furthest to reaching over 40 per cent of social housing. From the outset, they avoided a key pitfall: they built homes in city centres instead of on the periphery, thus avoiding the gradual development of poverty traps and high crime areas. European cities that built social housing on the outskirts became plagued with problems. Paris was especially bad. Over time, the banlieues, or suburbs, became home to new migrant communities and gradually lost their original mix of residents from different socio-economic classes. It has left those living there with poor transport links and sub-par schools and public services, leading to the periodic explosions of social unrest. “It was wrong to focus social housing on the edges of cities since it led to segregation and disconnection for the people who live there,” says Tadashi Matsumoto, the head of sustainable urban development at the OECD. He believes housing policies should not just be city-based, but co-ordinated with nearby suburban communities where there is more space. 

But social housing comes with its own set of problems.

But while increasing social housing in cities can help more people on modest incomes find a place to live, there are also downsides when private developers are constrained and the private rental market shrinks, says van Bortel, the Delft academic. In Amsterdam, where three-quarters of rentals are social housing or subject to strict rent controls, the rest of the private market has become very expensive as owners cannot raise rents elsewhere… those who are lucky enough to get subsidised Parisian apartments become loath to leave — only 6 per cent of apartments in the social housing stock change residents each year. The city does not force residents to move even if their incomes increase or if their family size changes.

A few observations:

1. It’s interesting that the cities in rich countries solve their affordable housing problems by constructing social housing, whereas developing countries tend to pursue market-based policies on affordable housing. 

There is no concept of public-supported rental housing in India, and all subsidised housing stock would be a tiny proportion of all urban housing stock. Even in slums, housing supply is market-driven. This is unlikely to change given the fiscal constraints facing governments.

2. Given the scarcity of land in urban areas and the absence of high-rise public housing, the weaker section public housing programs (like the IAY and PMAY) are largely confined to smaller towns and in the far-flung suburbs in the case of the larger cities, where there’s land available to construct single or low-rise units. Even in the largest cities, these low-rise (3-4 floors) colonies are geographically distant (from the city) and socially and economically cut off from it. They have become the Indian version of Parisian banlieues. 

3. In the absence of social housing, there are limits to what can be done to make housing affordable, especially given the already massive and further widening housing affordability gap in the large cities. Other policy concessions like credit subvention schemes (like the CLSS) or planning mandates (like 5-10% affordable housing mandates in large developments), only bridge the gap by a small amount to benefit the Indian middle class. None of these concessions can bridge the gap sufficiently to meet the requirements of even the lower middle-class, much less the poor. This reality must be acknowledged. 

4. In this backdrop, with public housing likely to play a marginal role for the foreseeable future, the only meaningful way to address the problem of affordable housing in Indian cities, especially for the lower-income group of urban immigrants (where household income is less than, say, Rs 20,000), is to bring all policy levers together. 

This would entail making public land available at subsidised rates, increasing the buildable area within the land, and lowering the cost of construction. Given the limited extent of public lands available, the first lever would be limited. However, supply can be augmented by using planning mandates on earmarking land for affordable housing. I’ll blog on this separately. The second lever can significantly offset the land cost by multiplying the extent of buildable area within the available land. 

Reducing the construction cost would require significantly lowering land registration and planning permission fees, GST, subsidising the cost of capital, and expediting all approvals and permissions for all affordable housing construction. This could be supplemented with some property tax concessions for, say, five years. A proposal for a scheme along these lines for state governments is discussed here. The revenue loss from these concessions should be counted against the subsidy that should have been required for social housing. 

5. Finally, like the European cities, there’s a need to focus on rental housing in urban areas. The Government of India came up with an Affordable Rental Housing Policy in 2015 and the Affordable Rental Housing Complexes (ARHC) scheme in 2020. Both need prioritised attention. However, it may not be advisable to leave the catalysis of the market in affordable rental housing to the private sector alone. State governments may have to play a direct role in derisking them by having State Housing Boards and public entities develop, lease, and manage such properties. The Government of India could incentivise with interest subvention and even some direct subsidy for capex. Once derisked, this can become a high-volume real estate segment, one that genuinely serves the Bottom of the Pyramid market.

Thoughts on affordable housing XI

This post in the series on affordable housing discusses the importance of transportation investments in promoting housing affordability. 

In an excellent 2014 paper, Katharina Knoll, Moritz Schularick, and Thomas Steger show that property prices remained constant in real terms for the major part of the development stages of 14 advanced economies (studied in the paper), driven in large part by transportation technologies and investments. 

This paper presents annual house price indices for 14 advanced economies since 1870. Based on extensive data collection, we are able to show for the first time that house prices in most industrial economies stayed constant in real terms from the 19th to the mid-20th century, but rose sharply in recent decades… By the 1960s, they were, on average, not much higher than they were on the eve of World War I. They have been on a long and pronounced ascent since then. For our sample, real house prices have approximately tripled since the beginning of the 20th century, with virtually all of the increase occurring in the second half of the 20th century. We also find considerably cross-country heterogeneity. While Australia has seen the strongest, Germany has seen the weakest increase in real house prices in the long-run. Moreover, we demonstrate that urban and rural house prices have, by and large, moved together and that long-run farmland prices exhibit a similar long-run pattern… 

While construction costs have flat-lined in the past decades, sharp increases in residential land prices have driven up international house prices… During the past four decades, construction costs in advanced economies have remained broadly stable, while house prices surged… Our decomposition suggests that about 80 percent of the increase in house prices between 1950 and 2012 can be attributed to land prices. The pronounced increase in residential land prices in recent decades contrasts starkly with the period from the late 19th to the mid-20th century. During this period, residential land prices remained, by and large, constant in advanced economies despite substantial population and income growth…

From the 19th to the early 20th century the transport revolution – mostly the construction of the railway network, but also the introduction of steam shipping and cars – led to a massive and well-documented drop in transport costs, often referred to as the transportation revolution. An important effect of the transport revolution was to substantially augment the supply of economically usable land… We show that this land-augmenting decline in transport costs subsides in the second half of the 20th century so that land increasingly became a fixed factor. At the same time, zoning regulations and other restrictions on land use also inhibited the utilisation of additional land in recent decades while rising expenditure shares for housing services added further to the rising demand for land…

Glaeser and Kohlhase calculate that the average cost of moving a ton a mile was 18.5 cents (in 2001 Dollars) in 1890 but had fallen to 2.3 cents at the beginning of the 2000s… The length of the railway network can serve as a proxy for the opening up of new territories over time. For our 14 countries, the length of the railway network peaked in the interwar period and has not grown materially since then… By 1930, essentially the entire world had been made accessible. Subsequent expansions of the transportation network through highways did not lead to a comparable fall in transportation costs… The dramatic efficiency gains in maritime transportation were also realized in the late 19th and early 20th century. The 19th century revolution in shipping rested on two developments: first, the fall of iron and steel prices that led to the introduction of metallic hulls; second, parallel advances in engine technology that led to much improved fuel efficiency Between 1870 and 1914 shipping costs fell by about 50 percent relative to the prices of commodities. By contrast, commodity-deflated real freight rates barely fell after 1950.

They offer a reinterpretation of David Ricardo’s hypothesis (made in the context of agricultural land, specifically where corn is grown) that, since land is a fixed factor, in the long run, economic growth will disproportionately benefit landlords. Further, given the unequal distribution of land, the rising land prices is likely to worsen inequality. They write,

The decline in transport costs kept the price of residential land constant until the mid-20th century. Yet the price surge in the past half-century could be an indication that Ricardo might have been right after all.

Illustrating the insights on the interaction between transportation developments and land prices, Binyamin Applebaum in the Times has an excellent article which shows how Tokyo has become a standout success in affordable housing on the back of a housing development strategy that revolves around mass transit. It has become the largest city in the world while also remaining affordable for its residents. Here’s a striking statistic.

Two full-time workers earning Tokyo’s minimum wage can comfortably afford the average rent for a two-bedroom apartment in six of the city’s 23 wards. By contrast, two people working minimum-wage jobs cannot afford the average rent for a two-bedroom apartment in any of the 23 counties in the New York metropolitan area.

This success comes with its costs and benefits

Maintaining an abundance of affordable housing has its downsides. Green space is scarce in Tokyo, living spaces are small by Western standards, and relentless redevelopment disrupts communities. But the benefits are profound. Those who want to live in Tokyo generally can afford to do so. There is little homelessness here. The city remains economically diverse, preserving broad access to urban amenities and opportunities. And because rent consumes a smaller share of income, people have more money for other things — or they can get by on smaller salaries — which helps to preserve the city’s vibrant fabric of small restaurants, businesses and craft workshops.

This is an important pointer to how Tokyo has managed a balancing act between urban growth and affordable housing.

From the air or from one of the city’s many observation decks, Tokyo appears as a vast sea of low- and midrise buildings laced with archipelagoes of high-rises, each island marking the location of a station along one of the city’s railroad lines.

This brilliantly captures the evolution of Tokyo’s housing landscape.

The Tokyu Railways Company developed the Den-en-toshi, or Garden City, line, which stretches southwest from the city center, in the 1950s as the backbone for a series of suburban neighborhoods of single-family homes… As Tokyo grew and demand for housing increased, the railroad has rebuilt the areas around its stations with condominium towers, shopping malls and office buildings. Around Futako Tamagawa Station, the largest of these new urban centers, Tokyu knocked down more than 100 homes to make way for more than 1,000 units in new apartment towers, as well as a new headquarters for the technology company Rakuten… 

The communities around the stations have grown denser, too, with apartment buildings interspersed among single-family homes. The population served by the Den-en-toshi line has increased from 20,000 people to more than 600,000. And the railroad, which once ran two-car trains three times an hour, now runs subway-style trains every few minutes, many of which continue into central Tokyo on a subway line. “We consider ourselves as a city-shaping company,” Hirofumi Nomoto, then chief executive of Tokyu, said in a 2016 interviewafter the completion of the Futako Tamagawa redevelopment project. “In Europe, for instance, railways companies simply connect cities through their terminals. That is a pretty normal way of operating in this industry, whereas what we do is completely different: We create cities.”

In stark contrast to Tokyo, cities like New York and others have stopped investing in mass transit lines and have strict restrictions on development along existing lines. And the consequences are evident in terms of housing unaffordability. 

This transit-led urban growth model has been supported by the city’s remarkably liberal zoning regulations.

In Tokyo, by contrast, there is little public or subsidized housing. Instead, the government has focused on making it easy for developers to build. A national zoning law, for example, sharply limits the ability of local governments to impede development. Instead of allowing the people who live in a neighborhood to prevent others from living there, Japan has shifted decision-making to the representatives of the entire population, allowing a better balance between the interests of current residents and of everyone who might live in that place. Small apartment buildings can be built almost anywhere, and larger structures are allowed on a vast majority of urban land. Even in areas designated for offices, homes are permitted. After Tokyo’s office market crashed in the 1990s, developers started building apartments on land they had purchased for office buildings.

Tokyo makes little effort to preserve old homes. Historic districts subject to preservation laws exist in other Japanese cities, but the nation’s largest city has none. New construction is prized. People treat homes like cars: They want the latest models. Between 2013 and 2018, new homes accounted for 86 percent of home sales in Japan, according to the most recent government data. In the United States, new homes typically account for about 15 percent of sales, according to data from the National Association of Realtors. One reason Tokyo looks forward is that little remains of the city’s past. Earthquakes, fires and American bombers destroyed much of the prewar city, and after the war, the rush to provide housing and the nation’s relative poverty produced a city that wasn’t meant to last… New buildings, and their occupants, also are more likely to survive the next earthquake… The ease of building in Tokyo means that new construction is not synonymous with luxury housing. Small workshops and factories are common…

Parks, too, are sometimes treated as unaffordable luxuries. Parks and gardens occupy just 7.5 percentof the city’s land, far below the figures for New York (27 percent) and London (33 percent). Mitake Park, once one of the few green spaces in the dense Shibuya neighborhood, is being transformed into a 26-unit apartment building. In the nearby neighborhood of Shinjuku, the government this year authorized construction of three high-rises that will eat into the Meiji Jingu Gaien, one of the city’s oldest and best-loved parks.

In another article in the Nikkei Asian Review, Benjamin Banzal and Jorge Almazan provide a nice description of Tokyo’s urban form.

After the firebombing of 1945, rebuilding was chaotic. Black markets flourished around train stations, while a severe housing shortage was often met with makeshift wooden homes on tiny plots, rather than large public housing. The government, constrained by weak institutions and scarce resources, was in no position to guide the city's recovery. When Japan's economic miracle took off in the 1950s, much of Tokyo's growth was driven by small, labour-intensive workshops embedded in residential districts. Zoning was flexible. Mixed-use, live-work arrangements were commonplace. Production chains were held together not by vertical corporate hierarchies but by horizontal social ties and local agglomeration economies. Subway expansion gradually allowed the city to grow outward, easing pressure on the center. Population density thus evened out across the metropolis. From above, Tokyo's vastness appears homogeneous, but its neighbourhoods remain distinct -- unified more by a shared set of local amenities than by architectural design. 

These amenities -- sento bathhouses, mom and pop stores, small manufacturing workshops, construction and building material contractors, eateries -- were tightly interwoven into the urban fabric and often owned and operated by local inhabitants, anchoring employment in neighborhoods. This model proved both functional and socially cohesive. With little open space, residents placed planters on pavements. Festivals were organised block by block. Economic growth did not produce stark urban divides. Tokyo remained relatively egalitarian in spatial terms.

The compact neighbourhoods that emerged in post-war Japan resemble the lightly planned, dense, mixed-use localities with small plots, narrow roads, limited public spaces, and low-rise multi-tenanted housing that characterise the majority of localities across all Indian cities. They have emerged organically through development by the original small plot owners, and encompass both slums and lower-middle and middle-class housing colonies. 

While in India, these colonies have largely remained stuck in time, with a slum-like quality of basic infrastructure. In contrast, Japan's provision of infrastructure and liberalised zoning regulations have allowed these colonies to become vibrant neighbourhoods that have retained their original character and social cohesion. 

The foundations of what we call the "Tokyo model" include dense, low-rise neighborhoods of around 20,000 residents per square kilometer woven together by narrow streets, gradually upgraded over time. Urbanism was "emergent," that is bottom-up and responsive to local needs… Private railway conglomerates such as Tokyu, Keio and Seibu also played a central role. They captured real estate value along their commuter rail lines -- building commercial hubs around stations and housing developments further out. In turn, Tokyo's transit system became one of the most efficient in the world, and helped spread the neighbourhood model across the metropolitan region… 

A mix of three phenomena around train stations added dynamism to this urban model. First, shotengaishopping streets, often covered arcades, branch off from station plazas and are filled with small, owner-run stores. Second, yokocho alleyways emerged when postwar black markets were regularised, allocating compact plots to bars and restaurants. These alleys still foster a strong sense of community. Third, zakkyobuildings -- narrow, multi-tenant towers on small lots -- stack diverse uses vertically, with their characteristic (neon) signage testifying to the vibrancy within.

Tokyo's urbanism has never been static. Over time, manufacturing gave way to services. Stricter environmental rules and broader economic shifts pushed industry out of the inner city. Height limits were relaxed, and taller apartment buildings began to rise along major thoroughfares. Since the 1980s, however, Tokyo's urban policy has increasingly tilted the balance toward top-down development. Floor-area-ratio restrictions were eased significantly. Special planning zones were introduced with looser urban restrictions. Tall, mixed-use towers -- especially near train stations -- became much easier to build, particularly since 2002… These towers often concentrate hundreds of apartments in a single building…

Unlike other countries that have incorporated tools for public participation, Tokyo's planning remains largely in the hands of powerful institutions: the central government, the Tokyo Metropolitan Government and its 23 special wards all have a say in decisions and have systematically sided with developers. As public consultation is minimal, community voices are rarely heard or often overruled. Over 200 redevelopment projects have already been completed since 2002 -- mostly in central areas like Roppongi, Shibuya and Toranomon. Many more are in the pipeline, including a second Roppongi Hills. As central areas will inevitably reach saturation at some point, developers are looking further afield in search of yield.

This is a good summary of the balance Tokyo has achieved between renewal and social cohesion. 

The Tokyo model deserves more recognition -- not out of nostalgia, but as a viable framework for future growth. Its buildings are constantly renewed. Its shops shift with demand. Its density supports both economic dynamism and social cohesion. It is a model built for change.

While I have quoted the trajectory of change in Tokyo’s urban form, the article itself cautions against the pace of change, which threatens the local character and social capital, replacing compact localities with homogeneous, gentrified high-rises. 

This has important lessons for developing countries like India, where the largest cities are already bursting at their suburban seams, mired in traffic congestion, and housing affordability is an acute crisis, with urban growth prospects facing strong headwinds. Sample this FT long read on Bangalore. 

The Tokyo example has strong relevance since Indian cities, too, are characterised by similar dense localities. Indian cities must create enabling mechanisms to allow them to shape and accommodate economic growth dynamically. It should allow, over time, pockets of high-rises to emerge so that the localities combine people from all economic classes.

This is important because the emerging landscape of India’s urban growth is that of older localities (both slums and middle-class colonies) frozen in time, increasingly congested, and with poor quality infrastructure (interspersed with pockets of affluent colonies), and suburban growth of homogeneous high-rise gated communities, interspersed with slums and squatter settlements. This is a deeply inefficient, unequal, socially dissonant, and growth-constricting form of urban development. 

A fundamental insight in urban development is that, given the fixed extent of land available in any city, there are only two ways to increase supply. The first is to develop vertically by raising the Floor Area Ratios (FARs), a topic discussed extensively in this blog (also this paper). The other option is to expand outward to encompass suburbs, while simultaneously building transportation infrastructure that shrinks the suburban sprawl and lowers commute distances. Tokyo illustrates how the combination of the two can keep housing prices affordable.

Transportation has traditionally been a performative aspect of urban planning in India, confined largely to instruments like road widths, land-use, and transport infrastructure creation (roads, Bus Rapid Transit, and metro railways). Unfortunately, public policy actions have largely been a form of isomorphic mimicry by transplanting top-down technocratic institutional arrangements (like UMTA/MTA and concepts like Modal Integration and Transit Oriented Development) that have worked in the cities of mature developed economies, without any thought for their integration with the local urban planning norms and without any meaningful social and political engagement and ownership by those stakeholders of the need for such changes. Even when implemented, they have remained only in form and have had little to show as substance. 

Accordingly, over the last two decades, we have seen that large transportation investments are made with limited changes to the master plan norms on land-use, FAR, and other measures to use the opportunity (presented by those investments) to shape urban growth and the future of the city. This is most egregiously manifest in the investments being made in new roads, road widenings, ring roads, BRT lines, metro-railway lines, and (now) the railway station redevelopment projects. In all these cases, there’s rarely any conscious, highest-level engagement to capitalise on the infrastructure investment’s geography-shrinking and housing supply-increasing potential by leveraging urban planning instruments. 

I blogged here that instead of being stand-alone PPP projects undertaken by the Indian Railways, railway station redevelopment projects should be viewed as urban regeneration projects that lay the foundation for the future of the locality and the broader city itself. I blogged here on the need to utilise metro railway investments as an opportunity to shape urban form by densifying the well-connected localities around stations through higher FAR and mixed land use. This and this are illustrative examples of transit-oriented development from London.

In conclusion, Indian cities require policy action at two levels. On the demand side, municipalities should adopt liberal planning regulations, such as those in Japan, that encourage renewal and vertical development, where feasible. The development of infrastructure,ties should complement thi roads and utilis. On the supply side, all transportation investments, especially metro rails, BRTS, or bus routes, should be approved only after easing planning regulations to permit significantly increased FAR and mixed-use developments around mass transit stations. This post provides more details on how to achieve such renewal.