Conceptualizing the connections of formal and informal housing markets in low- and middle-income countries, Housing studies, Published online 3 November 2020

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Informal housing markets have existed for a long time in low- and middle-income countries. Characterised by inadequate infrastructure, substandard quality and insecure tenure, informal housing is a pressing policy concern. It is estimated that 90% of future urbanization will take place in Asia and Africa, and informal housing will continue to be an important housing option. Informal housing is often spatially proximate to formal housing. This juxtaposition is a stock image of urban inequality – shiny skyscrapers next to favelas, bastis, zopdis, or gecekondu. As a result, informal housing markets are considered to be ‘dynamically intertwined’ with formal housing. Policy that is formulated to impact either formal or informal housing is likely to have reverberating effects on the other housing market. An analysis of the mechanisms that connect the two markets is thus critical to understanding how policy effects might travel from one market to another. However, there is as yet no consensus on how to theorize or model the interconnection of formal and informal housing markets.

This paper contributes to the housing literature by proposing a conceptual framework to analyze the connections between formal and informal housing markets. This conceptual framework identifies mechanisms by which formal and informal housing markets can influence each other – including competition, disamenity or negative spillover, and redevelopment or positive spillover. The preferences and decisions of residents are the micro-foundations of the link between formal and informal housing. These preferences are explored for their implications for housing policy. The paper demonstrates the applicability of this framework in the empirical case of Mumbai.

The preferences of residents who live in informal housing are heterogeneous and are related to these mechanisms in different ways. For example, the most recent and poorest migrants are more likely to live on precarious land or on pavements – such land is not in competition with formal housing. These residents might not be able to afford formal housing, and most informal housing is also unaffordable to them. There is no substitution effect here between formal and informal housing. On the other hand, disamenity effects are still operating as the negative externalities from informal housing might negatively impact prices in spatially proximate formal housing. To extend and generalize these findings to other contexts, it can be concluded that if in-migration into a city is marked by residents who cannot afford formal housing or most informal housing, then the connection of formal and informal housing is most likely to be marked by disamenity effects. While disamenity effects from informal housing might linger even as tenural rights become more solidified, the calculus embodied in the mechanism of competition between formal and informal housing may no longer hold in a city where informal housing has gained legitimacy. Duration of time without being evicted makes informal settlements and residents move up the continuum of tenure. Interviews with informal residents suggest that residents change their calculus about locational choice because of redevelopment policies.

Although this paper maintained the distinction between formal and informal housing for analytical purposes, the existence of a continuum of tenure implies that connections between formal and informal housing are likely to be multifarious, and causally heterogeneous – marked by changes over time due to the accretion of tenure status. Incorporating a temporal or dynamic element is thus essential to an understanding of the connection of formal and informal housing markets. The closer the housing types are on the tenure continuum, the more likely they are to be substitutes...

An important question for future research is how this framework would generalize, and which of these mechanisms dominates in different types of cities. In future research, formal models or agent-based models could be used to adjudicate between these different mechanisms – such as competition, disamenity, redevelopment, or null effects – by assuming different initial conditions and different patterns of spatial proximity. Since these effects are mediated by proximity, it’s important to consider intra-city variation and spatial models in future research. A shared conceptual vocabulary oriented around mechanisms could aid more integrated and cumulative research, policy-making, and political engagement by housing activists and residents.

More about Sukriti Issar, Assistant Professor at Sciences Po - OSC (homepage)