Implications of Land Use Act

This article was originally published by Yatindra KC in the Himalayan Times on September 15, 2019.

The Land Use Act was recently enacted by the government of Nepal with the intention of addressing issues such as decreased agricultural productivity, nuisance created by industries located in residential area, and environment pollution created by unplanned industrial activities resulting from unscientific and unplanned land use. For realizing the aforementioned goals, the act has determined how and in which manner a particular piece of land is to be used by segregating land into a total of ten classes. In addition, the use of land for a purpose other than originally classified in the legislation is considered as an offence against the act.

Whether or not a piece of legislature is within its constitutional limits to regulate how private property is to be used by its owner is a different debate altogether. Meanwhile, this article is concerned with the effect of such restrictions on the natural orderliness of the housing market.

Simple economics dictates that in the presence of limited supply and increasing demand, the price will go up. In other words, if the supply is decreased and the demand remains unchanged, there is upward pressure on the price of the product. As such, what the land use act through its categorization will be effective in achieving is, to limit the availability of land for specific purposes i.e. agriculture, residence and industrial activity, to name a few. To put it into perspective, if someone were to construct a house; he/she would have to look for a land categorized as residential by the legislation, because such construction cannot be done on any other piece of land categorized otherwise. Since, lands are categorized into ten groups, each having its own unique use, a form of disequilibrium in relation to land available for certain purposes and its demand is witnessed. While some areas like agriculture, may witness a greater supply in relation to its demand, other areas such as Housing and Industrial, will witness a shortage of supply in relation to demand.

It is apparent that, as land available for construction of houses become limited, affording houses will also become difficult due to the increased prices. This becomes especially troublesome when National reports such as Economic Survey of Nepal and the Census Report of Nepal have time and again concluded that affordability of housing is becoming difficult day by day. The effect of increased land prices is already reflected in the amount of rent that house owners seek.

However, that isn’t the only problem that is likely to be created by the act. Since 2003 land prices have gone up by more than 300 percent. This increase was fuelled by remittance earnings and speculations of prices going further up. These speculations of prices going up are sure to increase post the categorization of land and the limitation of supply effectively creating a housing bubble. Land use restrictions in the past have been known to cause housing bubbles. Given that there is already an upward pressure in land prices, the new land use act could possibly lead to the similar situation in Nepal.

The important thing to look for in the days to come is whether or not there is an adequate increase in the income level in relation to the increasing prices. If the income level does not increase while land prices keep rising due to speculations and limited supply, the Nepalese economy could witness a burst in the housing bubble. The burst could send shockwaves to the entire Nepalese economy as Nepal’s real estate sector is largely leveraged by the financial sector i.e. commercial bank lending and Development Bank lending. As per World Bank economic Update of 2019, real state exposure of commercial banks stands at around sixty three percent, given how much of real estate sector finance comes from Banks and Financial institutions, it would be reasonable to presume that in the unlikely event that a housing bubble bursts we could witness an economic crisis.

The implications of the act can range from a simple periodic and temporary housing bubble to a full-fledged economic crisis, a crisis we perhaps cannot afford at this period of time.