Reducing the barriers to make housing more accessible to the urban poor can significantly improve welfare in cities by slowing down the formation of slums. This is according to new research by Tiago Cavalcanti, Daniel Da Mata and Marcelo Santos published in the July 2019 issue of The Economic Journal.

They also find that relaxing regulation increases affordability and improves the accessibility of housing with no revenue loss to the government. They argue that a small relaxation in zoning restrictions, such as decreasing the minimum lot size or relaxing height restrictions, has a similar effect as a drastic reduction in property taxation or other housing related costs.

However, the research shows that welfare-increasing interventions, such as policies that alter the quality of slums, can have unintended consequences. The authors find that incomplete upgrades, such as providing basic infrastructure but maintaining non-compliance with existing building regulations, can make slums more attractive and encourage people to live there.

According to estimates from UN-Habitat, in 2014 30% of the urban population in developing countries lives in slums, which corresponds to about 881 million people. Slums subsequently represent a large proportion of housing markets in developing countries.

Nondurable structures, insecure land tenure and limited access to clean water, sewage treatment or adequate heating are some of the traits of slum housing, but despite the huge number of people inhabiting slums little is known about which policies are most effective in influencing their formation.

To effectively study slum formation, the authors build a model of a city that is consistent (e.g. share of slums, income inequality) with the urbanisation process of São Paulo, Brazil, which the authors then used as laboratory to evaluate different policies.

The research found that urban poverty, inequality and rural-urban migration are key to explaining slum growth in São Paulo from 1980 to 2000. Even though the paper focuses on explaining slum growth in one urban agglomeration (São Paulo, Brazil), the analytical framework developed in the study also contributes to understanding why some cities around the globe have more slums than others. This is because it is the widely held belief that demand factors (e.g., low income levels) are the main contributors to slum formation. However, the authors argue that supply-side factors (e.g., land use regulation) are equally important.

On the Determinants of Slum Formation by Tiago Cavalcanti, Daniel Da Mata and Marcelo Santos is published in the July 2019 Issue of The Economic Journal.

Tiago Cavalcanti

Associate Editor of the Economic Journal at University of Cambridge

Daniel Da Mata

Assistant Professor at Sao Paulo School of Economics – FGV

Marcelo Santos

Assistant Professor at Insper Institute of Education and Research