Housing Studies

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Conceptualizing the connections of formal and

informal housing markets in low- and middle-
income countries

Sukriti Issar

To cite this article: Sukriti Issar (2022) Conceptualizing the connections of formal and informal
housing markets in low- and middle-income countries, Housing Studies, 37:5, 789-808, DOI:
10.1080/02673037.2020.1831444

To link to this article: https://doi.org/10.1080/02673037.2020.1831444

Published online: 03 Nov 2020.

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HOUSING STUDIES
2022, VOL. 37, NO. 5, 789–808
https://doi.org/10.1080/02673037.2020.1831444

Conceptualizing the connections of formal and informal

housing markets in low- and middle-income countries
Sukriti Issar

Sciences Po, Observatoire Sociologique du Changement (OSC), CNRS, Paris, France

ABSTRACT ARTICLE HISTORY

In many cities in low- and middle-income countries, a sizable pro- Received 13 May 2019
portion of households live in informal housing. This paper pro- Accepted 25 September 2020
poses a framework for analysing the connections between formal
KEYWORDS
and informal housing markets, both at the city-level in terms of
Informal housing; housing
the mechanisms that link the two housing markets, and at the preferences; housing policy;
individual-level in terms of the preferences of residents for whom slum redevelopment;
informal housing is a possible housing choice. The framework formalization
identifies the mechanisms by which formal and informal housing
markets are connected at the city-level, including competition,
disamenity or negative spillover, and redevelopment or positive
spillover. Informal housing in Mumbai serves as an empirical case
to demonstrate the applicability of this framework. Results from
field research suggest that the connection between formal and
informal housing markets is dynamic – it can work in different
causal directions, change over time and vary by scale. The prefer-
ences of residents in informal housing are diverse, and have vary-
ing implications for urban policy.

Introduction
Informal housing markets have existed for a long time in low- and middle-income
countries. Characterised by inadequate infrastructure, substandard quality and inse-
cure tenure, informal housing is a pressing policy concern (Van Gelder, 2013; De,
2017; Jones, 2017; Shirgaokar & Rumbach, 2018). 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 (UN, 2014). Informal housing is often spatially prox-
imate 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
(Monkkonen & Ronconi, 2013, p. 1957). Policy that is formulated to impact either
formal or informal housing is likely to have reverberating effects on the other housing
market (Payne, 2001). An analysis of the mechanisms that connect the two markets is

CONTACT Sukriti Issar sukriti.issar@sciencespo.fr Sciences Po, Observatoire Sociologique du Changement

(OSC), CNRS, Paris 75007, France

I am grateful to Anna Klabunde, Julia Drew and Myungji Yang for their generous input at various stages of this
paper. I thank the two anonymous reviewers for their insightful feedback.
ß 2020 Informa UK Limited, trading as Taylor & Francis Group
790 S. ISSAR

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 (Brueckner & Selod, 2009;
Marx et al., 2013; Van Gelder, 2013).
This paper contributes to the housing literature by proposing a conceptual frame-
work 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 structure of the paper is as follows. The next section defines informal housing
and introduces the idea of the ‘continuum of tenure’, followed by an outline of data
and methods. The main argument is presented in two sections; the first section
focuses on the macro-level connections between formal and informal housing mar-
kets, and the second section focuses on micro-level connections through an analysis
of housing preferences.

Defining informal housing

The first step in elaborating a framework of the interconnections between formal and
informal housing is definitional – what is the distinction between formal and infor-
mal housing? Conceptually and on-the-ground, the definition of informal land/hous-
ing can be ambiguous and hard to pin down (Nijman, 2008). The lack of clarity
emerges from the overlap and conflation of informal housing with ‘slums’, and from
the varied nature of informal housing within and across cities. Although UN defini-
tions of ‘slums’ stress both sub-standard housing and infrastructure, and tenural
issues, informal housing in its purest definition refers to tenural issues only (UN-
Habitat, 2003). Feler & Henderson (2011, p. 255) point out that economists ‘prefer to
define informality based on ownership rights’. These definitional problems are com-
pounded by the way that informal housing is enumerated. For example, in the Indian
census, the sub-city data leaves it unclear whether enumerated ‘slum’ neighbourhoods
are tenurally illegal or merely sub-standard.1 In 2001, more than half of Mumbai’s
population (53%) was enumerated as living in neighbourhoods classified as ‘slums’
(RDDP, 2016). This number declined to 42% in Census 2011 (RDDP, 2016).2 A GIS
mapping exercise in 2015 identified 3,293 ‘slum clusters’ in Mumbai.3 It is estimated
that such settlements occupy 8% of Mumbai’s land area, while residential housing
occupies 25%.4 In separate enumeration exercises, approximately 40% of slums were
estimated to be on public land, and 60% on private land in Mumbai (1995 data).5
Public land is owned by a local, regional or central state agency, while private land is
owned by a private owner (who may or may not be the individual who organized the
occupation of the land). Differences in land ownership affect the odds of eviction and
the economic and political calculus of residents and landowners (Durand-Lasserve &
Selod, 2009; Van Gelder, 2013). Many policies related to informal housing in
 HOUSING STUDIES 791

Mumbai (especially slum redevelopment) apply to both private and public land, blur-
ring the policy implications of the distinction.
Recent research highlights that the distinction between formal and informal hous-
ing is not binary. Instead, tenural rights are variegated, heterogeneous, and hard to
classify, what the UN report ‘Challenge of Slums’ refers to as ‘complex forms of hous-
ing tenure’ (UN-Habitat, 2003, p. 8). In other words, tenural status and the perceived
tenure security of informal housing often goes beyond any binary classification of
property rights into formal and informal (e.g. Brueckner & Lall, 2015; Celhay & Gi,
2020; Durand-Lasserve & Selod, 2009; Payne, 2001; Rakodi, 1992; Shirgaokar &
Rumbach, 2018; UN-Habitat, 2003, p. 12; Weinstein, 2014). For example, Payne
(2001) identifies the following categories from the informal to formal end of the ten-
ure continuum; pavement dweller, squatter tenant, squatter ‘owner’ unregularised,
tenant in unauthorized subdivision, squatter ‘owner’ regularized, owner in unauthor-
ized subdivision, legal owner in unauthorized construction, tenant with contract,
lease-holder, and free-holder. Moving toward the formal end of the tenure continuum
is one way that informal residents climb the housing ladder (Lizarralde & Root,
2008). There is a growing recognition that the varieties of tenure that actually exist
on the ground reflect de facto tenure security (Nakamura, 2017; Feler & Henderson,
2011; Shirgaokar & Rumbach, 2018). For example, Feler & Henderson (2011) note
that eviction was rare in Brazilian cities, and that residents perceived security of ten-
ure. Few households reported lacking title; instead, ‘many households without true
title answer yes to having title because they do not feel insecure about their holdings’
(p. 255). Field research in Mumbai suggested that informal housing as it ages or
endures, can become legitimized and move toward the de facto tenure security end of
the continuum, although this is not guaranteed. To be ‘legitimized’ might reduce
threats of eviction but is not a guarantee of legal status.6
For more than three decades, formalization, which is usually interpreted as the
state granting land titles to residents in informal housing, has been a prominent,
albeit contested, policy idea (Varley, 2017). Formalization-as-titling is based on an
assumption of binary tenural rights – it assumes that titling transforms residents of
informal housing into formal housing residents, moving them from one end of the
tenure continuum to the other (de Soto, 2000; Brueckner & Selod, 2009, p. 38).
Evaluations of titling show ambiguous results, partly because de facto tenure security
already exists in some cases pre-formalization, or because formalization can have
unintended consequences such as gentrification (Field, 2005; Lemanski, 2011;
Mitchell, 2005; Payne, 2001; but see Varley, 2017 for a contradictory view on gentrifi-
cation effects). Formalization can take other forms than titling, such as the provision
of infrastructure, occupancy permits, temporary licenses and so on (see also Jones,
2017). For example, in Mumbai, temporary permits have been provided over time to
many residents living in informal settlements (e.g. Weinstein, 2014). These forms of
formalization can create intermediate property rights that provide legitimacy if not
legality (see also Nkwae & Dumba, 2010 for Botswana; Tarlo, 2000 for Delhi;
Durand-Lasserve & Selod, 2009 more generally). The distinction between formal and
informal land is thus not a dichotomy but a continuum, implying that residents and
migrants face a range of housing and tenural choices. The continuum of tenure
792 S. ISSAR

implies that gains from formalization must be qualified; ‘slums’ does not always imply
informal housing that needs to be formalized through titling, and informal housing
might already be characterised by various types of legal or quasi-legal rights. Keeping
these definitions and the idea of the continuum of tenure in mind, the next section
outlines the data and methodology, before moving to the macro-level connections
between the two housing markets.

Data and methodology

This paper draws on field research in Mumbai, India conducted during multiple field-
work trips over 2006–2017. The author conducted 80 in-depth interviews with policy
experts and stakeholders, and 35 interviews with residents who live in informal hous-
ing. The paper also draws on original research conducted by the author in state
archives and local urban planning libraries. Policy experts interviewed by the author
included urban planners in the municipal corporation and regional development
agencies, bureaucrats in housing and urban ministries, municipal engineers, housing
activists and NGOs, real estate professionals, and academics. Interviews with policy
experts were in-depth interviews tailored to their expertise, and focused on policies
related to housing, ‘slum’ redevelopment, and development planning processes and
their history. Residents interviewed in informal settlements were long-term residents
likely to meet the eligibility standards for the state’s redevelopment program, living in
geographically dispersed settlements in Mumbai (including southern, central, and
northern parts of the city). Based on Payne’s (2001) tenure continuum, the residents
interviewed during field research can best be classified as tenants in unauthorized
subdivisions and squatter ‘owner’ (regularized). The settlements where interviews
were conducted were characterized by one-room durable structures, or the two-room
structures locally termed as ‘one plus one’ (which consists of a single-room divided
horizontally in two, creating a mezzanine), lacking sanitation, in dense neighborhoods
with narrow alleys (see Figures 1 and 2). Interviews with residents in informal hous-
ing were qualitative structured interviews using a discussion guide that focused on:
employment, housing history, neighborhood history, neighborhood experiences with
redevelopment, sanitation, services, and voting behavior. All interviews were con-
ducted by the author, on-site. All interviews were verbatim transcribed on-site, typed
up and annotated. Interviews with residents in informal housing were entered into
NVIVO Qualitative Analysis Software, and themes were identified based around the
discussion guide. The field research in Mumbai is supplemented with comparative
case studies from the secondary literature on informal housing in low- and middle-
income countries.
This paper focuses on identifying empirically-grounded generalizable mechanisms
for the connections between formal and informal housing markets. A mechanism-
based approach is particularly useful for building a conceptual framework that syn-
thesises findings across disciplines and case contexts, and for research fields with
fragmented or inadequate data (see Bengtsson & Hertting, 2014; Falleti & Lynch,
2009; Kay & Baker, 2015). The literature on informal housing is vast, taken up by dif-
ferent disciplines, and by interdisciplinary fields such as urban or development
 HOUSING STUDIES 793

Figure 1. Photograph by author. Interior courtyard of an informal housing settlement.

studies. There is a strong tradition of qualitative and quantitative case studies on dif-
ferent cities, and specialist literatures that use formal models or simulations.
However, research on informal housing is challenged by undependable statistics that
are difficult to compare across time and space. The aim of this paper is to search for
mechanisms that are generalizable or portable – where generalization is based on
‘expectations about similar patterns of thinly rational action and interaction in similar
contexts’ (Bengtsson & Hertting, 2014, p. 708). A mechanism-based approach that
focuses on how effects are transmitted, and on opening the black-box of causation is
useful for testing and extending findings across case contexts.
794 S. ISSAR

Figure 2. Photograph by author. Narrow alleyway and water storage in an informal hous-
ing settlement.

Macro-level connections of formal and informal housing markets

There are divergent views in the literature on the macro-level connections between
formal and informal housing markets. One view is that of competition, namely that
the two housing markets compete with each other, such that informal housing occu-
pies land that could be used for formal housing thus ‘squeezing’ prices in formal
housing markets (Brueckner & Selod, 2009). Another view is that of substitution,
where it is assumed that urban regulations raise prices in formal markets leading
 HOUSING STUDIES 795

Table 1. Mechanisms connecting formal and informal housing markets.

Hypothesized
Mechanism causal direction Price effects How it works
Competition Informal to formal Price increase in the Assumes zero-sum land supply
formal market
Disamenity or Informal to formal Price decrease in the Results from spatial proximity
negative spillover formal market
Redevelopment or Formal to informal Price increase in the Changes in the expectations of
positive spillover informal market residents due to government
policy. Works through spatial
proximity but can have city-
wide effects
Eviction pressures Formal to informal Price decrease in the Effect of rising tenure insecurity
informal market
No connection None Price effects in formal or Price effects might cancel each
informal housing result other out – positive and
from other processes e.g. negative effects might work in
gentrification, contradictory ways resulting in
speculative investment. no net effects

residents to substitute informal housing for formal housing (de Soto, 2000). Yet
another view is that the effects of urban regulations on formal and informal land
markets are complex in cities in low- and middle-income countries. For example,
Monkkonen & Ronconi (2013) argue for Argentina that, contrary to expectation, lib-
eralized building regulations are associated with higher real estate prices, while tighter
regulations result in lower prices and more informal housing due to non-compliance.
This paper contributes to the housing literature by integrating these diverse views
into a conceptual framework, and developing a common vocabulary for the mecha-
nisms that connect formal and informal housing markets.
To generate a list of mechanisms that connect formal and informal housing mar-
kets at the macro-level, the paper starts with two factors – first, the direction of caus-
ality (either from formal to informal housing, or from informal to formal housing)
and, second, the attendant price effects (either increase or decrease).7 The current
paper considers all possible combinations of these two factors – direction of causality
and price effects. The two factors, each with two levels, result in 2  2 or four mecha-
nisms, plus the fifth mechanism of null effect. This is not a comprehensive list of
mechanisms, but a starting point based on field research and the literature. Table 1
summarizes these mechanisms, and outlines the hypothesized direction of causality
and price effects. Each of these mechanisms is discussed in detail below, through the
empirical case of Mumbai.
First, the paper considers the null hypothesis of independence of price effects
between formal and informal housing. Recent increases in formal real estate prices in
Mumbai cannot be directly attributed to increases in land occupied by informal hous-
ing as the mechanism of competition would suggest. This can be explained as follows.
The population enumerated in slums has declined from the 2001 to 2011 census as
mentioned earlier. In addition, the overall population in the southern Island City of
Mumbai (that is, excluding the ‘suburbs’) has also declined over the 2001–2011 cen-
suses.8 This southern part of the city has grown vertically through new construction,
adding on new apartments and floor space. Land supply increased for commercial
and residential uses as Mumbai’s centrally located textile mills were redeveloped,
796 S. ISSAR

especially after 2001.9 There are fewer informal housing settlements in this part of
the city.10 A new business district has developed in Bandra Kurla, further reducing
pressure on the southern part of the city (Gandhi et al., 2014). Despite these develop-
ments, prices have skyrocketed in recent years. This combination of population
decline, building boom, and high prices points to the operation of speculative invest-
ment and gentrification. Due to speculative investment in real estate and factors that
aren’t related to the ‘economic fundamentals’ of the housing market, price rises are
likely in global cities (Case et al., 2012). Increases in formal housing prices in
Mumbai do not appear to be caused by the expansion of informal housing.
The second mechanism is that of competition between formal and informal land,
as mentioned above, which has been interpreted as informal housing or settlements
squeezing formal land and increasing prices in the formal housing market (Brueckner
& Selod, 2009). The mechanism of competition is a reasonable empirical approxima-
tion in cities where informal housing occupies substantial tracts of land, and where
land on which informal housing is built is in competition with land for formal hous-
ing. These conditions are differently met in different cities. In Mumbai, many infor-
mal settlements have been built on land that is precarious, wasteland, state owned,
zoned commercial, or zoned as open space – e.g. pavement or railway line (Roy
et al., 2014; more generally see Van Gelder, 2013; Jones, 2017). Such land is not con-
vertible into formal residential housing. It is also the type of land most likely to be
occupied by low-income in-migrants with the fewest housing options. Informal occu-
pation of such lands would not increase prices in the formal market through compe-
tition, as such land is not amenable to formal housing development. It can be argued
that there are fewer and fewer parcels of land in the island city that can be seen as
competing between formal and informal housing. As Gilbert says more generally, ‘in
many places even the expansion of self-help housing has reached its limit’ (Gilbert,
2008, p. iii).
The third mechanism for the connection of formal and informal housing markets
is that of disamenity or negative spillover. Informal housing might be a disamenity,
creating negative externalities associated with congestion and infrastructure overload.
Proximity to informal housing might have negative spillover effects that reduce prices
in the formal market (Monkkonen & Ronconi, 2013, also argue for disamenity
effects). Research at the sub-city level in Mumbai, finds a negative correlation
between prices and proximity to ‘slums’ (Gandhi et al., 2014). However, this finding
does not imply that disamenity is the driving mechanism in Mumbai as the finding
does not imply causation. The disamenity finding might be endogenous – informal
housing is more prevalent in areas where prices have historically been lower (e.g. the
suburbs of Mumbai). Because of the inadequacy of temporal data on informal hous-
ing, most quantitative studies cannot address endogeneity (see Gyourko & Molloy,
2014 for challenges of establishing causality in urban analyses). It is possible that
proximate informal settlements result in lower prices for formal housing at the sub-
city level, while at the city-level the price squeezing finding still holds. The argument
would work as follows: In the immediate vicinity of a disamenity (such as informal
housing), prices fall due to negative externalities. However, the overall supply of
desirable land shrinks, driving up prices citywide (e.g. Ohls et al., 1974). Thus,
 HOUSING STUDIES 797

informal housing might result in price decreases in spatially proximate formal hous-
ing markets, and price increases in the city overall through the operation of different
mechanisms (disamenity and competition respectively).
The case of Mumbai suggests a fourth mechanism for the connection of formal
and informal housing markets, namely positive spillover mediated through govern-
ment policy. In an ad hoc way since at least the 1980s, and formally since the mid
1990s, the slum redevelopment policy has been an important link between formal
housing construction and existing informal settlements (for details see Weinstein,
2014; Nijman, 2008). Under this policy, developers are cross-subsidized for redevelop-
ing informal housing. Slum redevelopment incentivizes a developer to link the formal
and informal markets, leveraging their interest in the formal market to drive the
building of low-cost housing stock for qualified/eligible residents of informal housing.
Residents in informal settlements are provided apartments, while the developer builds
an additional set of apartments for the formal market (the ‘for-sale component’ of
slum redevelopment). Additional floor space further incentivizes the developer to
redevelop informal housing. There is an element of compensation provided to resi-
dents of informal settlements under this policy; apartments are notionally free, and
developers front maintenance charges for a number of years.
Coming to the price effects of slum redevelopment policies, high prices in the formal
market have led to increases in informal market prices mediated by spatial proximity –
a positive spillover effect from formal markets prices to informal markets. In response
to redevelopment policy, the residents interviewed by the author during field research
reported price increases in informal housing driven by the future possibility of redevel-
opment (see also Bhide & Solanki, 2016). This is especially true if an informal settle-
ment is spatially proximate to an expensive or fashionable district. Infrastructure
improvements also increase prices in the informal market – that is, moving formal and
informal housing closer to each other can increase prices in the informal market (see
Payne, 2001 on unintended consequences of changes to tenure status). In other words,
prices could increase in the informal market without any change in population (for
example, without in-migration into either the formal or informal market). Interviews
with informal housing residents suggest that redevelopment policies have changed the
expected utility of residents in locational decisions, such that expectations of redevelop-
ment could drive residents to continue to live in substandard housing (the expected
utility derives from the value of the future redeveloped apartment).
The fifth possible mechanism is an impact from formal housing to the informal
market that results in price decreases in the informal market. Theoretically, a price
decrease in informal housing markets could occur if there is an imminent threat of
eviction (for example, because of eminent domain or public land acquisition). The
type of informal housing most susceptible to eviction is often housing at one end of
the tenure continuum, for example, pavement dwellings. Pavement dwellings are the
least secure tenure types, and are often associated with ‘no rights’ (e.g. Aristizabal &
Gomez, 2004 on Bogota). This is also the type of housing that is least commodified
(Payne, 2001), which makes price effects difficult to establish. A definitive empirical
case example was not found for this mechanism during fieldwork in Mumbai and it
is not discussed further.
798 S. ISSAR

To summarize, there are multiple mechanisms through which formal and informal
housing markets are linked, with causality running in both directions. Based on the
preceding analysis, the following generalizable and testable conjectures emerge:
Where informal housing occupies land that competes for formal housing construc-
tion, there might be increased prices in the formal market; where informal housing is
spatially proximate to formal housing, there might be decreased prices in formal
housing due to disamenity effects; where informal housing is close to fashionable dis-
tricts, prices might increase in the informal market, and residents in informal settle-
ments might make increased efforts to restrict their own housing mobility. In other
words, the connection between formal and informal housing markets is causally het-
erogeneous - the mechanisms can work in different causal directions, change over
time and vary by scale. As a result, contradictory price effects (or null effects) might
be observed due to multiple mechanisms at play. City-level findings might swamp
subtler or contradictory price effects at a sub-city level.
Building on the ideas developed so far, the next section turns to the micro-founda-
tions of the connection between formal and informal housing, and the preferences of
residents for whom informal housing is at least one possible housing choice.

Micro-level connections of formal and informal housing markets

Affordable formal housing is a policy conundrum in many low- and middle-income
countries. An analysis of residents’ preferences and decisions provides insights into
how residents sort themselves into formal and informal housing. Low-income residents
or in-migrants have various housing choices along the continuum of tenure, depending
on their willingness and ability to pay, and depending on the availability of housing
stock at different price points (Lizarralde & Root, 2008. For a discussion of preferences,
location decisions and trade-offs in informal housing, see Stokenberga, 2019; Celhay &
Gi, 2020). A common first option, in cities like Mumbai, for in-migrants who lack
resources or social networks, is to live on the street or in vacant ground with little or
no physical shelter. Such residents might stake out a spot that persists at least in the
short term, and might be connected to a nearby labour market. They might also live
on precarious land, undeveloped land, land reserved for other uses in the development
plan, in structures offering minimal shelter. This was apparent from the housing histor-
ies that residents in informal housing recounted during interviews. Interviewees men-
tioned having constructed their first shelter on vacant ground, on pavements, on
ground surrounded by shrub, under plastic tarp, with mud floors, and slowly improv-
ing their living conditions sometimes over decades. Ethnic, religious and regional ties
influence housing and locational choices (Naik, 2015). Migrants with social networks
can leverage these for a place to stay, even if only temporarily.
Three distinct assumptions about the preferences of residents in informal housing
animate the academic literature and influence policy thinking, though they are not
always made explicit. It is assumed that informal housing residents are paying less
than the bottom rung of the formal housing market either because, 1) they prefer to
do so, trading off lower commuting cost for amenities or living in low-cost housing
as a migration strategy (e.g. Naik, 2015; Cai & Lu, 2015), or, 2) are forced to live in
 HOUSING STUDIES 799

housing of poorer quality than they could access if there were fewer regulatory con-
straints on housing supply (e.g. Glaeser, 2011), or, that 3) residents are paying more
than they can reasonably afford even when living in informal substandard housing.
Gulyani & Talukdar (2008, p. 1917) call this last assumption the ‘low-quality high-
cost trap’ of informal settlements (see also Tipple, 2015). These three assumptions
highlight the need to account for the heterogeneity of preferences amongst the resi-
dents of informal housing (see also Stokenberga, 2019). Although assumptions 1 and
2 seem similar, the differences are apparent when each assumption is considered in
detail in the light of housing policy. These three assumptions can be seen as distinct
spaces on a continuum of affordability (see also Lizarralde & Root, 2008). The first
assumption refers to a group of residents for whom informal housing is affordable,
and who make housing choices to ensure adequate income for non-housing needs.
Seasonal or recent migrants might be more likely to reflect this assumption, living in
informal housing to save on housing expenses, and to send remittances to family (e.g.
Cai & Lu, 2015). The second assumption refers to the preferences of residents for
whom informal housing is very affordable. These residents are well able to meet non-
housing needs and could afford to live in formal housing all else equal. Interviews
conducted by the author with long-term residents of informal housing in Mumbai
reflect this assumption. Some long-term residents had improved their income levels
yet were staying put in informal housing to await redevelopment. The third assump-
tion refers to groups for whom informal housing is unaffordable – neither housing
nor non-housing needs are adequately met for this group. Unemployed, under-
employed, low-skilled or new migrants are most likely to reflect this assumption.
These three assumptions about the preferences of informal residents are now eval-
uated in the light of field research in Mumbai and comparative case studies from the
secondary literature.
According to the first assumption, residents in informal housing prefer to live in
informal housing, trading-off affordability against accessibility or amenities. They
‘choose to live’ in sub-standard housing as a migration strategy (Cai & Lu, 2015, p.
171, for China generally; Kim, 2016 for Beijing; Naik, 2015 for Gurgaon, India).
Formalisation is often the policy aimed at such residents, with the aim to improve
the built environment, tenural status or infrastructure. There are possible unintended
consequences of formalisation. Formalisation, whether as titling, infrastructure
improvements, or temporary permits, can be a political and legal minefield (see for
example Aristizabal & G omez, 2004, on Bogota; Rigon, 2016 on Nairobi). Middle-
class residents, who often perceive urban squatting as a disamenity, might consider
formalization (especially when it involves the provision of redeveloped apartments)
an unjust ‘reward’ for squatting. The granting of formal titles could be followed by
gentrification, making formal and informal residents worse off (De, 2017; Rigon,
2016; Shirgaokar & Rumbach, 2018).
Considering this preference in the light of formalization policy (in any of its
forms): after formalization, it is assumed that residents pay more rent. Formalization
is theorized to result in price declines in the existing formal market, allowing formal
residents to theoretically compensate the erstwhile informal residents, squaring the
process toward pareto efficiency (see the results from the formal model in Brueckner
800 S. ISSAR

& Selod, 2009, p. 39). This does not appear to be the logic behind formalisation or
compensation in Mumbai. As mentioned earlier, slum redevelopment through public-
private partnership is the policy model for informal housing in Mumbai today.
During field-research, residents viewed slum redevelopment as involving ‘land in
exchange for land’ and believed their compensation should be in the form of an
equivalent floor space.11 Housing activists agreed, seeing this as just compensation -
the assumption being that residents ‘own’ their homes and the state needs to
compensate residents for taking their homes during redevelopment. Policy-makers’
calculus, emerging from their experience with past policies, appears to be that the
provision of free housing as compensation is the only way redevelopment will work.
A range of past policies including in situ upgrading, regularization, and subsidized
‘buy’ schemes did not work in Mumbai (Weinstein, 2014). For instance, it was found
that residents did not have the appetite for even heavily subsidized housing or loans.
For many residents in Mumbai’s redevelopment projects, even the maintenance
charges are too much to pay on a formal market apartment at the bottom-most rung
of the formal housing market, which is how slum redevelopment apartments can be
classified (see Lizarralde & Root, 2008; Lemanski, 2011 for similar patterns in South
Africa). This suggests that there are few mechanisms for the provision of formal low-
cost housing without significant state intervention.
Moving to the second assumption – that residents squat not out of a preference for
lower housing costs, but because they are forced to do so due to the lack of low-cost
formal housing options. In this case, the assumption is that residents want to pay, but
there are not enough housing units for them. They are forced to pay a price lower than
they would prefer to pay in order to live in the city. The lack of affordable formal hous-
ing at the lowest price point is often linked to governance dysfunctions, including regu-
latory restrictions on housing supply (such as minimum lot sizes or building height
restrictions). For example, it has been said that building height restrictions in Mumbai
‘just force people to crowd into squalid illegal slums rather than legal apartment
buildings’ (Glaeser, 2011, p. 160). The construction of low-cost affordable housing is
the policy prescription often aimed at such residents. However, in Mumbai, as else-
where, this has long been a conundrum for policy-makers – how to incentivize the for-
mal private sector to provide housing for the bottom of the pyramid.
Field research and interviews with residents in Mumbai’s informal settlements
suggest that residents are often unwilling to move to the outer suburbs, which is the
part of the city where they are most likely to be able to afford low-cost formal hous-
ing without state subsidy. This unwillingness includes reasons such as commuting
costs, distance from work, school and community, social networks, and attachment to
place (see also Stokenberga, 2019 for Bogota; Celhay & Gi, 2020 for Chile). During
interviews, residents reported not wanting to move because they had invested in their
built structure and in neighbourhood ties. Residents sometimes preferred to live in
informal housing for the flexibility that such housing provided in generating income
opportunities for a household (constructing additions to the structure for rent, or
starting a home business). Mira Road, a northern suburban locality of Mumbai, was
often mentioned as an example of a back-of-beyond outer suburb that was most
likely to meet the price points of those looking to climb the housing ladder by
 HOUSING STUDIES 801

moving out of Mumbai’s informal settlements into formal housing. Moving there was
seen by some as a significant come-down in social status. During an interview con-
ducted by the author, a resident was asked if there are differences between those that
live in informal settlements and those that move out of the informal neighbourhood
into an apartment. ‘Their way of thinking will not change [soch kya badlegi?]. After
all, they are not living in a posh area, they are living in Mira Road’.12
Affordable low-cost formal housing has long been a seemingly unsolvable policy
problem in low- and middle-income cities around the world, and Mumbai is no
exception. A few years ago, then Commissioner of the Mumbai Municipal
Corporation noted that, ‘affordable housing is a challenge in Mumbai as the defin-
ition of the term is getting equated with free housing owing to the city’s demography’
(Indian Express, 20/8/2015). This is partly because since 1995 the main policy for
informal housing has not been formalization-as-titling but rather the slum redevelop-
ment program mentioned earlier. This program links resident community groups
(cooperatives or housing ‘societies’) with developers through urban policy tools and
incentives that provide formal apartments rather than titles. Although titles are usu-
ally seen as fairly inexpensive and quick to implement (Field, 2005), slum redevelop-
ment has been slow. It has however shored up the legitimacy of residents and
increased their incentives to ‘stay put’ as they await redevelopment rather than selling
out – because selling out would mean moving to the outer suburbs while redevelop-
ment usually provides in situ resettlement for eligible residents (Weinstein, 2014).
Despite its appeal, there are various critiques of slum redevelopment. Some authors
see the redevelopment program as presenting a moral hazard that encourages the
‘proliferation of slums by incentivizing players to act with strategic foresight’
(Gandhi, 2012, p. 230). It is also argued that residents often sell out and move out of
apartments built under slum redevelopment. In response to such a possibility, slum
redevelopment policy prohibits the sale of redeveloped apartments for a period of ten
years, preventing these formal redevelopment apartments from constituting a formal
market. Instead, when property sales take place (which happens despite the prohib-
ition), such sales are ‘under the table’, implying corruption and bribes. The statistics
on the prevalence of this selling out practice are meagre, but it was reported by
expert respondents during fieldwork. During interviews, some policy makers told me
that such selling of apartments is not a serious downside to redevelopment. They
pointed out that regardless of whether the ‘formalized’ residents sold out or contin-
ued to live in the redeveloped apartments, low-cost formal housing stock had been
added to the city. On the other hand, another policy expert told me that redeveloped
apartments are beset by ‘elite capture’ where subsidized housing is captured by those
higher up in the income brackets (Rigon, 2016 notes similar effects for Nairobi;
Rakodi, 1992 more generally). Other authors such as Lizarralde & Root (2008), writ-
ing about Cape Town, note that redeveloped apartments, or the ‘induced formal sec-
tor’ as they call it, often fails to form a market of its own.
Given the prevalence and seeming intractability of informal housing, a key policy
question is what it would take to construct affordable formal housing that meets a
range of price points. One of the arguments in the literature is that liberalizing urban
regulations (such as building heights restrictions) will result in the building of enough
802 S. ISSAR

housing that prices will fall to the level that people will not squat, or that loosening
restrictions will allow developers to target this segment directly (see for example,
Bertaud, 2011; Glaeser, 2011, p. 160; Brueckner & Sridhar, 2012). Note that the mech-
anisms are different in the two cases – in the first case, enough time must pass for
the slow process of creating housing to exert downward pressure on price, while in
the second case housing is directly created for the low-cost segment. Lall et al. (2007)
find that relaxing minimum lot sizes increases housing supply, but also increases in-
migration, which might outstrip housing supply growth resulting in the further for-
mation of informal housing. The question of the relation of urban regulations like
buildings heights to informal housing is far from settled, and a full treatment is out-
side the scope of this paper.13 The case study of slum redevelopment in Mumbai and
the politics around urban regulations provides one suggestive data point. The policy
model of slum redevelopment in Mumbai specifically works off of low building
heights. De-regulation would take away the incentive floor space index that the state
offers to developers and would have revenue implications for the state budget. Recent
attempts to liberalize building height restrictions in the city still proposed to continue
the incentive uses for slum redevelopment (see the draft Development Plan, (DDP,
2015). Slum redevelopment provides land at subsidized cost or free to the developer,
and provides an additional incentive in building height concessions. It is a sobering
finding that a widely acknowledged win-win policy, involving a massive subsidy of
land, building incentives for developers, and free housing for residents, has met with
such slow implementation. In this context, it seems unlikely that a pure market
model, which only deregulates height restrictions, could sustainably meet the low-cost
housing shortage.
Coming to the third assumption about preferences and decisions, that residents in
informal housing are caught in a ‘low-quality high-cost trap’: Gulyani & Talukdar
(2008, p. 1925), writing about Nairobi, note that ‘even the cheapest slum housing,
although less expensive than other options in the city, is probably not cheap enough
for its poor residents’. This is a finding that resonates across many cities. A 1969
study from Mumbai found that the low incomes of those living on pavements ‘put
even slum housing beyond their reach’.14 More recently, Gandhi (2012) noted that
given current housing prices, incomes, and bank lending terms, only 6% of residents
in Mumbai could afford a house in the city proper (p. 232). An official working in
the state housing agency told the author that by his estimation 80–85% of Mumbai’s
population lives in slums, chawls or cessed buildings.15 As a result, in his perspective,
a minority of residents living in formal housing are ‘subsidizing’ the rest of Mumbai’s
residents. Similar trends can be observed elsewhere. In Bogota, those classified in the
bottommost economic strata (Strada 1) cannot afford formal or informal tenure, and
the next strata cannot afford most formal housing (Aristizabal & G omez, 2004).
Krishna et al., (2014), writing about Bangalore, note that first generation migrants
that have recently migrated into the city are erstwhile agricultural labour, ‘some of
the poorest people in rural India’ (p. 8), with low education, few prospects, and lack
of documentation. They live in the worst kind of informal housing, and their ability
to access even the higher rungs of the informal housing market is limited. This is a
segment of the housing market that formal market actors are least likely to respond
 HOUSING STUDIES 803

to without massive state subsidy. On the other hand, third and fourth generation
migrants in Bangalore, often living in notified slums (with occupancy rights and bet-
ter access to infrastructure) were found to be lower-middle class, with better job pros-
pects, and higher educational attainment. These longer-term residents are more able
to move out of informal housing, and might be trading off location against housing
quality and/or the expected utility of redevelopment. Improvements in formal hous-
ing supply could most efficiently target this subset of informal residents.
Many authors accept that the provision of formal low-cost housing is extremely
challenging within a reasonable commuting distance from the CBD. Gandhi (2012)
recommends building affordable housing in the ‘hinterland’ of Mumbai. However,
what used to be the hinterland in Mumbai, say areas north of the locality called
Andheri, has now become an area where even middle-class residents struggle to
afford housing. So an affordable low-cost hinterland would make the location trade-
off severe. This hinterland is practically another jurisdiction, or a separate housing
market from Mumbai, and raises the question of how substitutable different jurisdic-
tions are to each other. This last assumption on preferences – that informal housing
residents are paying more than they can afford for very low quality housing – is the
most sobering one for policy recommendations. Authors often suggest the need to
improve the functioning of labour markets, mortgage markets, and provision of infra-
structure and serviced land as important stepping stones (e.g. Gandhi, 2012 for
Mumbai; Collier & Venables, 2014 for African cities). In other words, the provision
of low-cost formal housing requires intermediate steps that themselves are long-
standing policy conundrums. This list of preliminary steps for a functioning low-cost
formal housing market illustrates the challenges of providing housing at the bottom
of the pyramid. It supports the idea that self-help solutions of auto-construction
might be an essential step in housing attainment, and a continuing aspect of urban-
ization in low- and middle-income countries.

Conclusion
This paper proposes a conceptual framework for analysing the interconnections
between formal and informal housing markets that can be extended, adapted and
generalized to other cities. The paper contributes to the housing literature by identify-
ing mechanisms by which formal and informal housing markets are connected at the
city-level, including competition, disamenity or negative spillover, and redevelopment
or positive spillover. An important question for future research is how this framework
would generalize, and which of these mechanisms dominates in different types of cit-
ies. Cities are characterised by different histories of settlement – diverse timing of in-
migration into informal housing, and varying sequences of settlement of formal and
informal areas. For example, locations that were not previously in competition for
formal residential housing might become so as a city grows and engulfs outlying
informal settlements. Over time, the mechanism that connects the two housing mar-
kets is likely to shift from competition toward disamenity or redevelopment in the
following manner: Areas of a city at t1 could be characterised by competition between
formal and informal housing. Over time as residents gain tenural rights, the threat of
804 S. ISSAR

eviction might decline. Plans for redevelopment, even if delayed, might cement the
legitimacy of residents. However, disamenity effects could continue to operate regard-
less of the changing odds of eviction. It is likely that the mechanisms linking formal
and informal housing markets occur in varying temporal sequences, strengthening
the case for historical case study research and dynamic models. In future research,
formal models or agent-based models could be used to adjudicate between these dif-
ferent 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 (see also Roy et al., 2014).
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 hous-
ing. 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 hous-
ing 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 infor-
mal 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 hous-
ing for analytical purposes, the existence of a continuum of tenure implies that con-
nections 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 under-
standing 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.
Drawing from Payne’s continuum of tenure mentioned in the first half of this paper,
we would expect that housing options closer on the continuum (such as pavement
dweller and squatter tenant, or tenant with contract and freeholder) are more likely
to be in the choice set of an individual (Payne, 2001). It is less likely that an individ-
ual would choose between options far away on the continuum such as choosing
between being a squatter tenant or freeholder. The closer housing options are on the
continuum, the more alike or substitutable they are, implying that if they are spatially
proximate they are less likely to create disamenities. In other words, spatial proximity
will cause disamenity especially when the contiguous housing types are furthest away
on the continuum (hence the juxtaposition of skyscraper and the favela). The idea of
 HOUSING STUDIES 805

the tenure continuum is both a description of actual tenure conditions and a move
away from the formal/informal binary (e.g. Payne, 2001). The tenure continuum is
also a policy prescription; some authors argue that there should be a range of tenure
or housing options in local housing markets, since a gap between formal and infor-
mal housing markets can restrict movement up the housing ladder (Lizarralde &
Root, 2008).
This paper identifies a set of mechanisms that link formal and informal housing
markets, and the preferences that underlie these mechanisms. These mechanisms are
a step toward a framework of the connection between formal and informal housing
markets, and help generate testable expectations that enable comparison across and
within cities. Future research could focus on developing dynamic models that account
for the increasing legitimacy of informal housing over time. Survey research could in
the future be used to better understand the full range of housing options within a
city and the choice sets of residents. Finally, more dialogue across disciplinary divides
can enrich urban research and enable the discovery of generalizable mechanisms of
urban informality. A shared conceptual vocabulary oriented around mechanisms
could aid more integrated and cumulative research, policy-making, and political
engagement by housing activists and residents.

Notes
1. The first Indian census to fully enumerate slums was Census 2001, which defined slums
based on a largely public health definition from a 1956 Act (GOI, 2010).
2. The decline in the enumerated slum population might result from redevelopment,
clearance or relocation.
3. http://timesofindia.indiatimes.com/city/mumbai/First-ever-GIS-study-shows-3293-slum-
clusters-in-Mumbai/articleshow/49810365.cms
4. The DDP (2015) noted that 25% of developed area in Mumbai is put to residential uses
as of 2012 – this includes slum housing, but slum housing can also be included under
other land uses such as vacant lands.
5. Afzalpurkar Committee Report. 1995. Programme for the Rehabilitation of Slum and
Hutment Dwellers in Brihan Mumbai.
6. Until residents are far enough toward the formal contractual end of the tenure
continuum, tenure security can remain precarious and governments can use the law or
eminent domain to effect evictions.
7. These two factors are elaborated from the paper by Brueckner and Selod (2009), which
stresses one of these mechanisms, that of competition.
8. ‘Suburbs’ refer to the area north of Mahim, accounting for 75% of the city’s population
(Census of India, 2011). The 2001–2011 population growth rate was þ8.3% in the
suburbs and -7.6% in the city.
9. Due to lobbying by market actors, deindustrialized textile mills were replaced by high-
end development rather than affordable housing.
10. Author calculation: the population living in ‘slums’ was 17% in the city and 83% in the
suburbs (taking Mahim as the boundary; Census 2001).
11. Interview 65, resident of informal settlement, June 2009.
12. Interview 68, resident of informal settlement, June 2009.
13. There is an active debate on how regulatory constraints impact informality (e.g. Lall et al.
2007; Monkkonen and Ronconi 2013).
14. We, the Invisible: A Census of Pavement Dwellers, 1988. SPARC and SPRA.
806 S. ISSAR

15. Interview 73, 10/7/2010, state official in housing. Chawls are tenements built originally
for industrial labor. Cessed buildings are dilapidated structures that fall under a
special tax.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Notes on contributor
Sukriti Issar is an Assistant Professor in OSC (Observatoire Sociologique du Changement),
Sciences Po, Paris. Her research interests focus on urban policy and governance, institutional
change, and research methods.

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