India’s housing vacancy paradox: How rent control and weak contract enforcement produce unoccupied units and a housing shortage at the same time

One housing paradox in many markets is the simultaneous presence of high costs and high vacancy. India has expensive housing relative to incomes and an urban housing vacancy rate of 12.4%. We look at two possible explanations for vacancy – pro-tenant rent control laws, and poor contract enforcement. We use public goods as a placebo test. Using a two-way linear fixed effects panel regression, we exploit changes in rent control laws in the states of West Bengal, Karnataka, Gujarat, and Maharashtra to find that pro-tenant laws are positively related to vacancy rates. A pro-landlord policy change liberalizing rent adjustments reduces vacancy by 2.8 to 3.1 percentage points. Contract enforcement measured by density of judges is negatively related to vacancy. Provision of public goods and amenities tend to raise vacancy. This is consistent with property owners tending to be reluctant to rent out their properties in more desirable areas. We estimate that a policy change in rent control laws would have a net welfare benefit and could reduce India’s housing shortage by 7.5%.