Chapter 2: Informal housing markets: A review

In the last decades the problem of the so-called informal settlements in developing countries has been researched, discussed and addressed in a variety of ways. Approaches have ranged from 'clearance and redevelopment' in the '50s and '60s, to sites-and-services and upgrading in the '70s and '80s. Involving scholars, governments and international agencies, the debate has passed through different stages: the 'marginality consensus', the 'slum of hope' phase, the 'progressive consolidation' period, and finally, as Gilbert puts it, "we are arguably now in the in the evils of commercialization phase"(Gilbert 1991, 8).

This chapter reviews the mainstream of literature concerning informal housing markets in developing countries. First, it focuses on the concept of housing markets and its different lines of segmentation. Then, it goes on to explore the role of informal settlements as part of the market forces covering literature on land, rental and shared sub-markets. Finally, providing clues on the functioning of non-ownership alternatives, it discusses the phenomena of commodification in informal settlements, particularly rental forms, reviewing policies and approaches.


2.1. Defining housing markets

Several factors restrain the definition of housing sub-markets in developing countries. First, the rapid urban growth rate combined with political instability that originate continuously changing scenarios. Second, the informal nature of most housing processes that impedes the availability of consistent data. Third, and most important, the social, economic, cultural, and geographical contexts inherent to each urban center that result in completely different market configurations.

Orthodox market theory states that the range of options available in the housing market (or supply) enable consumers (or demand) to exercise, at least in theory, their 'residential choice.' When the 'consumers' are the poorest groups, these choices are usually limited to the informal portion of the market. In this context, it is a frequent over simplification to reduce the market to the two-fold division, formal-informal, considering the informal sector as a 'temporary dysfunction caused by rapid growth and imbalances in the distribution of resources and income'(Gilbert and Ward 1982, 81). Rakodi criticizes such dualistic analysis stating that "it conceals the segmented nature of the housing supply" (Rakodi 1992, 44).

Literature segments housing markets according to different indicators. Lim (1987, 179) considers legal aspects such as: 'legality of land occupancy, legality of the physical characteristics, and type of occupancy.' Stryuk (1990, 49), analyzing the Indonesian market, considers form of production, quality, form of tenure, and security of occupancy. Some other frequent lines of characterization include: location, size, cost, site, quality of services, and so forth (Environment and Urbanization 1989, 2).

According to Van Lierop (1989, 122), the term housing market designates 'a conceptual framework within which occur a variety of interrelated and mutually influenced processes.' Each of these processes, or sub-markets, has its own operating procedures, its own standards, and its own costs. In informal settings, most sub-markets coexist side by side in spatial entities such as neighborhoods, blocks or even individual dwellings, and quite often they overlap each other. But sub-markets are not necessarily geographically contiguous entities, on the contrary, most times they extend their limits over neighborhoods in different locations. Thus, any successful modeling of housing sub-markets has to consider necessarily the maze of interrelated sub-markets, and the broader social-economic context in which they operate (Rothenberg 1991, 65; World Bank 1993, 20).


2.2. Informal settlements viewed as sub-markets

Possibly because of disillusion with, and the need of alternatives to self-help and sites-and-services, a new approach emerged in the '80s: low income settlements viewed as informal sub-markets. The so called 'crisis of self help' brought about the fact that informal housing through self help does not have just a use value, as argued by Turner (1976; 1982), but a potential market value as attested by Burgess. Once consolidated with security of tenure and basic infrastructure, self-help housing looses its pure use value and becomes a commodity that can be rented or sold (Burgess 1982, 61). According to this new set up in the discussion, studies in different parts of the world begun to report the existence of well-established housing sub-markets, even in the poorest settlements (Sudra 1981; Hart Deneke et al. 1982; Martin 1982).

Majority of the contributions in the field of informal sub-markets deal with case studies in several parts of the world. Some major cities such as Bogota (Edwards 1982), Mexico (Gilbert 1989; 1993; Gilbert et al. 1991; Ward 1982), Ahmedabad (Mehta et al. 1989; Whadva 1989b), Karachi (Van der Linden et al. 1983), Nairobi (Amis 1984; 1988) or Bangkok (Marcussen 1990, Sheng 1992) have been analyzed exhaustively. However, the coverage is still undeveloped in terms of regional and intermediate city studies (Payne 1988, 8).

Three main areas of coverage interest this research: rental, shared and land sub-markets.

2.2.1. Rental Sub-markets

There was practically no research on rental housing in developing countries before the 80's. Some early reports on the phenomenon appear in the context of discussions over squatter settlements and self-help as universal solution. For example, in his influential critic on self-help, Ward observes a process of subdivision of cheap tenements in the older colonias populares in Mexico city: "...this subdivision is either speculative in nature or is a mechanism whereby poorer, would-be self-help builders are able (by subletting) to maintain, and perhaps improve, their holdings" (1982, 205). There are reports of large informal rental sub-markets also in El Salvador and Zambia. Hart Deneke and Silva (1982, 238) state that "nearly two thirds of the population has had access to housing through a situation involving a landlord-tenant relationship." Similarly in Lusaka, Martin (1982, 271) points out that rental accommodation 'became very popular in squatter settlements constituting the most common alternative among poor households.'

In the last ten years, studies on rental housing have experienced a remarkable expansion. The following discussion covers issues such as, the variety of rentals forms in informal environments, their role as income generators, the nature of the demand and supply, and the landlord-tenant relation.

Variety of rental options

The nature and characteristics of rental sub-markets vary from country to country. In Mexico, Gilbert recognizes two basic types of rental housing: the formal or controlled market, that comprises both private and public sector accommodations, and the informal or uncontrolled sub-market that includes rental forms in slums and squatters in the consolidated self-help periphery (Gilbert 1991, 88). In the case of Ahmedabad, Wadhva (1989a, 18) identifies a third segment, the semi-controlled market, that neither falls into the regulation of the Rent Control Act, nor in the open uncontrolled market.

Rental sub-markets provide a variety of choices for low income groups. For instance in Colombia, Edwards (1982, 138) mentions two major sub-markets for poor tenants: room rentals and apartments or uni-family house rentals. In Bangkok, Angel and Amtapunth (1989, 173) in a study mainly concerned with the controlled market, identify five components in the low cost rental system: concrete apartments, wooden apartments, low-cost houses, land subdivisions, and room and housing land rental slums. Also in Bangkok, De Wandeler et al. provide a deeper insight on the range of alternatives available in rental slums: "The informal sub-market includes accommodation types such as a bed, a part of a room, and a room, which are not available in the home-ownership market" (De Wandeler et. al. 1992, 16). Further expanding the range of options, Aina (1989,39) describes rental arrangements in Lagos that do not concern even a bed, but just a "sleeping area" in places such as garages, workshops and front yards.

The demand for rentals

Tenants of informal rental housing tend to be young and are usually at the bottom third income bracket of population. These are some of the few findings that appear to be common ground in the literature about the demand for rental housing. But what is the nature of this demand in informal environments? There is no absolute answer to this question.

Gilbert (1983, 454) identifies two stereotypes of the demand for informal rentals. The first is based on Turner's 'bridgeheader' model (1968): the 'upwardly mobile migrant who chooses to rent until obtaining a secure job and then moves with his family to ownership in a spontaneous settlement.' The second stereotype is the 'stagnating tenant' suggested by Van der Linden (1983; 1986): the poor family unable to own because of the unavailability of land and "which rents only as an unsatisfactory alternative." While the first type of demand is frequently associated with central tenements or slums, the latter is associated with the self-help periphery.

Evidence from different countries prompts that neither of these models suffice to explain the nature of the demand for rental housing, and that the polarity central slums-peripheral squatters is not always applicable. For example in La Paz, Van Lindert (1982, 147) finds that, although renters in central tenements respond to some of the characteristics of the bridgeheader model, they are far from being ownership seekers. Despite being able to afford ownership in the periphery, most conventillo tenants prefer renting in the run-down but well-located tenements. On the other hand, Edwards (1982, 144) suggests that even in the self-help periphery, some tenants "value the flexibility of renting and shy away from the responsibilities and commitments of ownership." He concedes, however, that 'for most households renting is a secondary alternative; it is overwhelmingly a negative response to shortages in the supply of cheap land rather than a matter of housing preference'(ibid. 150).

The suppliers

Whether due to personal decision or unavoidable need, the demand for non-ownership alternatives is steady. But then, who caters for this demand in informal environments? Landlordism in squatter settlements seems to vary between two extremes: the small scale landlord renting one or two spare rooms, and the 'professional' landlord that speculates with the demand of cheap housing (Rakodi 1992, 43). Several studies report widespread petty landlordism, but no evidence of speculative practice; for instance, Edwards (1982) in Bucaramanga, Colombia, Pennant (1990) in Malawi and Aina (1989) in Lagos, Nigeria.

Others have found a completely reverse situation. Amis reports that practically the whole squatter sector in Nairobi constitutes a rental sub-market exploited by an elite (Amis 1984, 1988; Lee Smith 1990). Turner (1987) in Poona, India, and Andreasen (1989) in Thika, Kenya, describe a similar form of landlord operation based on illegal slum development for rent (3) . Gilbert and Varley (1991), in Guadalajara and Puebla, Mexico, report a mixture of both types with slight predominance of small scale landlords.

Landlord-tenant relations

The relations between landlords and tenants vary according to the type of rental operation. Whereas in the large-scale exploitative type, owner-landlords hardly have contact with tenants (except through go-betweens and hired landlords), in small scale rentals most of them live in the same plot, or at least in the same neighborhood (Edwards 1982, 147). When small landlordism predominates, landlord and tenant have similar social-economic background and a quite cordial relationship. The illegal character of the transaction keeps owners away from any kind of 'marketing,' instead, they prefer to advertise through word of mouth, and they often let out to kin and friends. Neither landlord nor tenant is aware of the law and very rarely they sign contracts (Gilbert 1993, 52; Edwards 1982, 147).

Marcussen (1990) in Jakarta, Sheng (1992) in Bangkok, and Gilbert in Mexico arrive to a similar conclusion: 'in consolidated self-help settlements, the socioeconomic characteristics of landlords are rather similar to those of their tenants' (Gilbert 1991, 91; 1993, 93). Datta (1995) in Gaborone, Botswana, finds that women outnumber men as landlords. In a gender oriented discussion she argues that female landlords tend to have better relationship with their tenants than male landlords. But even though landlords and tenants may share similar characteristics, this does not mean necessarily that their relationship is benevolent. For example, Amis and Lloyd (1990, 25) attest that poor landlords have less finance for investment and are frequently totally dependent on tenants' rents. Therefore, they can be as hard or harder than affluent landlords.

Rentals as source of income

Room letting often contributes to supplement incomes of poor households. In Bangkok, low cost rentals in informal subdivisions have helped slums-dwellers to move out to better housing (Angel et al. 1989). In Karachi, J. Van der Harst (1982) exposes a similar phenomenon: room letting in informal subdivisions has helped dwellers to finance the improvement and enlargement of their houses.

Indeed, informal rentals seem to play a financial role for some low-income home-owners. Most evidence from Latin America suggests that rentals are a way to generate extra income, rather than a way to make profits. Edwards (1982, 147) in Bucaramanga, Colombia, finds that for 90 percent of landlords rent to supplement low incomes. Similar findings, but in lesser degree, reports Gilbert in Mexico, Chile, and Venezuela (Gilbert and Varley 1991; Gilbert, 1993).

In Jakarta, research by Marcussen shows an increasing trend in number and variety of rental options in peripheral kampungs. As in Karachi, room letting plays a supporting role for most households and frequently it contributes to finance house extensions. Quite often, these rental forms develop in small-entrepreneurship combining room letting, shops, small home-based industries and sub-division and sale of plots. Although its clear commercial bias, "the system may be characterized as subsistence rent farming, and is in this sense an aspect of the household economy" (Marcussen 1990, 164).

2.2.2. Shared Sub-markets

Shared housing is a topic sparsely covered in the literature on housing in developing countries. In fact, very few studies deal with shared housing, even less considering it a sub-market. At the most, it appears in chapters of books or articles in periodicals accompanying the debate on rental housing.

Perhaps one of the reasons of this neglect is that shared variations are often mixed and hard to distinguish from rental options (Sudra 1981; Gilbert and Varley 1991; Gilbert 1993). Tomasz Sudra (1981; 1982) in Mexico, reports the presence of "renters who pay no rents." In the ciudades perdidas, he identifies three types of zero-rent renters: arrimados, cuidadores, and employer-provided-housing dwellers. Rent-free arrangements in which payments are 'in kind' are certainly somewhere in-between sharing and renting. A frequent response to this dichotomy is to define the rental-shared sub-market as a range of shades between the two extremes (Aina 1989, 30; Ahmad 1989, 50). For example in Bangkok, De Wandeler and Khanaiklang subdivide the non-ownership oriented sub-market into several 'sub-categories of rental, rent- free, and shared options' (1992, 117).

As most renters, sharers are at an early stage in their life cycle, when flexibility counts most. Citing Hamer (1981), Gilbert conjectures the main reasons for sharing: 'undefined preferences related to employment and residential location, relative inexperience of the functioning of the housing market, and limited resources that make it difficult to acquire assets' (Gilbert 1983, 462).

Considering that there is no monetary transaction, some may dissent with the inclusion of shared housing as a sub-market. However, if one recognizes the strong ties between rental and shared options, and the way they influence each other interacting with other segments of the market, there is no doubt shared housing performs as a sub-market (4) . Although analyzed separately for clearer conceptualization, rental and shared sub-markets conform a duo that caters the demand for non-ownership alternatives for the lower strata of population.

2.2.3. Land sub-markets

Aware of the influence of the availability of land in informal housing, many researchers prompted greater attention to the processes by which the majority of poor people presently obtain their housing and the land markets of which they are a dynamic part. In this research angle, the literature covers different issues. In a comprehensive review of land sub-markets, Payne summarizes the following: the main types of land and housing sub-markets in terms of entry costs and perceived tenure security; the sociopolitical context in which sub-markets operate and their changes over time; the socio-economic groups served by informal land subdivisions; and case studies of particular land subdivisions (Payne 1988, 5).

The tendency is to focus upon case studies of particular cities or even settlements, though some develop a more comprehensive evaluation. For example Gilbert and Ward (1983) stress the political dimension of housing and access to urban land in three South American cities (Mexico, Bogota and Valencia) with particular attention to the role of self-help. Applying similar methodology, but in a country wide study, Gilbert (1989) reviews land sub-markets in urban Mexico, exposing how political pressures influence land and housing processes.

Others concentrate on the the phenomena at the urban scale, regarding major metropolises or capital cities. For example in Istanbul, Yonder (1987) distinguishes several typologies of land sub-markets and analyses its changes over time. Angel et al. (1987; 1989) identify five major housing sub-markets addressed to low income groups in Bangkok: government's land-and-house projects (subsidized walk-up apartments, serviced plots and core houses in sites-and-services projects); low-cost housing produced by the private sector; informal land subdivisions; slums and squatter settlements; and low-cost rental housing (both formal and informal). Also in Bangkok, Sheng (1993) deepens in the interrelation between these sub-markets, and reports the advantages of practices such as, land sharing as an alternative to resettlement and relocation.

Environmental and economic aspects are frequently less covered than political issues. Schoorl, Van der Linden and Sheng (1983) cover in detail environmental and dwelling issues, as well as the functioning of informal sub-markets in the bastis of Karachi. Blaessers (1981), in Medellin and Bogota, relates costs and levels of affordability, and describes layouts of plots and design of buildings in different degrees of consolidation. Mehta and Mehta (1989) examine the role of demand and supply in land and housing sub-markets and the effects of rent controls in the context of metropolitan Ahmedabad.

Most literature agrees on the crucial role of informal land sub-markets in the supply of ownership alternatives for the poor. But increasing evidence shows that land sub-markets do not only influence ownership options. They also exert a determinant influence in the development of non-ownership alternatives such as rental and shared housing. For example, easy access to land in the form of squatter settlements or informal subdivisions can hinder the expansion of rental housing by keeping rents low (World Bank 1992, 96). Conversely, constraints in the supply of cheap land can derive in higher rents and oversized rental or shared sub-markets. The case of Bucaramanga, Colombia, exemplifies how the viability of rental housing depends greatly on the supply of land (5) . About 1970, the plateau over the city had grown was almost entirely covered by residential developments and the outburst of invasions and pirate settlements. By 1973, the proportion of renters in the city had risen to 52.5 percent, and to 54.5 percent in 1979 (Edwards 1982, 136).


2.3. Demand and choice of tenure

When households search a place to live comparing accommodation in different sub-markets, they are generating demand for a certain type of housing. Demand for housing is largely based on need. Often stated as synonyms, demand means need. But it also implies affordability and the willingness to acquire a product or service. In these terms, the demand for housing can be viewed as a choice of tenure. The choice, in the formal market, is usually posed between owning or renting a house or apartment (Wadhva 1988, 1989b). In informal sub-markets the options include: home ownership through squatter or illegal subdivisions, or rentals such as a bed, a room, a house or a piece of land (Gilbert 1983, DeWandeler et al. 1992).

Among the factors influencing housing preferences, location and affordability are the most influential (Wadhva 1988, 1989b). Mehta and Mehta relate housing preferences to the stage in life cycle of households, and distinguish a set of three determinants or regions: socio-demographic and economic characteristics, the level of affordability, and the perception of housing opportunities and prices. At an early stage in life cycle, households base their preferences on their housing background and their primary housing needs. In the second phase, their preference is influenced mostly by the perception of affordability and the awareness of housing opportunities in the market. Finally, the third stage comprises a process of housing adjustment driven by changes in aspirations and mismatches between housing type and need (Mehta and Mehta 1989, 131).

In informal sub-markets the 'consumers' are the poorest of the poor. In such circumstances, tenure choice is often reduced to rent-free and sharing arrangements, as has been discussed above. Coulomb raises doubts about if such a choice even exists: "...the issue is whether the majority of renters are forced into rental accommodation because there is no alternative open to them" (Coulomb 1989, 47). In the same line, Edwards (1990, 257) asserts that housing choice is a positive function of income. Those with the lower incomes face the smaller range of alternatives. However, he recognizes that there is no direct correlation between tenure and social class, nor even between tenure choice and income groups. "Families earning the same level of income, choose different types of housing, and others with very different incomes, choose the same form of tenure" (Edwards 1982, 150).


2.4. The commercialization of informal housing

Comprehensive studies reveal some major changes that have been taking place, of which the commercialization of previously community based initiatives are perhaps the most significant. Ward (1982), and Skinner and Rodell (1983) remark how commercial pressures have intensified considerably, changing the nature of informal processes. Amis and Lloyd (1990) report the overwhelming expansion of the commercialization phenomenon in Africa. In a later study, Kosta Mathey (1992) retakes the discussion over self-help (Ward 1982), and through case studies in different continents confirms the increase of commercial practices in informal settlements.

2.4.1. Commodification

Labeled 'commodification' by Mehta and Mehta, this tendency of commercial penetration into informal settlements is widely reported in the literature (Payne 1988, 33). Various studies have observed and documented the process of consolidation that turns the former informal housing into a commodity. Ramirez et al. suggest that with increased security of tenure and improvements over time, housing becomes marketable. They indicate that the whole process of housing production in informal settlements is, at the same time, a slow process of housing commodification (1992, 95, 102). But commercialization occurs not only in consolidated settlements. For instance, Pasternak Taschner (1992, 150) registers 'land and hut' sub-markets in Sao Paulo, Brazil, even during invasions. More complex sub-markets such as rentals, seem to require at least some degree of consolidation (Edwards 1982, 145).

2.4.2. Rentals, good or evil?

Opinions about commercialization in the context of self help housing, particularly rental practices, are at the least controversial. Some claim that rentals lower the housing standards of the poor opening the door to speculators (Marcus 1992; Burgess 1982, 1992). Others consider the phenomenon more cautiously, arguing that, although it can bring the 'degenerations' of the market forces, namely speculation, cost increase, gentrification, it can also benefit a considerable number of families (Ramirez et al. 1992; Pasternak Taschner 1992). A third position recognizes its inevitability, and argues openly in favor of rental housing (Edwards 1990; Mehta and Mehta 1990). Gilbert, for example, advocates: "To ignore rental housing, given that up to half of the population is living in such accommodation, is simply irresponsible. Renting has to be recognized as both a respectable and a necessary housing option" (1993, 158).

2.4.3. Diversified markets and policy

'Diversity of the supply is the key for a successful housing sector,' states the World Bank in a recent document (1992, 15). This affirmation marks a departure from the traditional Bank approach regarding informal settlements, centered mainly on ownership-oriented options such as, upgrading and sites and services. It also implies the tacit recognition of informal rental sub-markets as a component of the overall housing market. Nevertheless, the consideration of these sub-markets in housing policies is still at very early stages in most developing countries. In the context of comparative research in Mexico, Santiago de Chile, and Caracas, Alan Gilbert asserts:

At present few Latin American governments seek balance in their housing policies and most consistently favor a single-faceted housing solution. They encourage owner-occupation, sacrificing other forms of housing tenure in the altar of the favored option. The effect is to narrow the range of housing alternatives, which leads inevitably to a decline in the living standards of the poor (1993, 160).

In the same stream of thinking, other recent works stress the importance of a diversified housing sub-market. Rakodi (1992, 50) in a comprehensive review of housing sub-markets, remarks that housing policies must be addressed concurrently to all different sub-markets, and should not consider any segment in isolation. In particular, she considers rental sub-markets "a neglected segment of the market." Similarly, Hansen et al. advocate for the diversification of housing alternatives, shifting the scope to rental housing:

Because home-ownership is becoming more difficult and renting is likely to become the predominant form of housing in most Third World cities, housing policy might well focus more in promoting rental markets. Efforts should be made to stimulate the production of rental housing, including both informal housing, such as the rental of rooms in a small house, and more formal rental units, such as apartments (1988, 316).


2.5. Conclusion

Research on housing sub-markets in developing countries has increased considerably in the last fifteen years, marking a shift in the approach "from studies of homelessness, to studies of lodging"(Peattie 1994, 140). The consideration of informal housing as sub-markets has lead to a better understanding of the processes by which the poor access land and shelter in the developing world. Land and housing have been studied and described in large metropolitan agglomerations, particularly in some Latin-American and African countries. Yet, the nature of sub-markets in smaller urban entities still deserves research attention.

Although some times it may develop in a form of large-scale 'capitalist exploitation,' there is consistent evidence that rental sub-markets in poor communities may play a role that goes beyond mere speculation. On one hand they cater the poorest segments of society increasing the range of choices for those who cannot afford the price of ownership, and for those who in search of better opportunities needs mobility rather than stability. On the other hand rentals have a supportive role for poor households contributing to income generation and even financing housing. In addition, rental sub-markets may play a crucial role boosting micro-scale economy at neighborhood level.

Shared sub-markets complete the spectrum of non-ownership alternatives for poor families. Despite wide-spread evidence of the phenomenon, it is remarkable the limited coverage literature has devoted to this issue. Conversely, the influential role of land sub-markets and its dynamics of commercialization have been a frequent subject of analysis in recent years. The diversity of the supply of informal rental housing is clear evidence that no single solution can cater the needs of the urban poor. It is only through better understanding of these options, that more effective responses can be forwarded to improve the living conditions of a significant portion of urban population. In next sections, non-ownership alternatives shall be aring among the legal owner and the occupants of the land.


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