Poor families want livable neighborhoods, not slums. No family ends up in a shanty or barebones concrete structure by choice. Good housing, however, comes with a price tag that is prohibitive for the poor, who typically have no alternative but to accept levels of physical discomfort, overcrowding, legal insecurity, and dangers that would be scandalous in the US and Europe. In Latin America & the Caribbean, 1/3 of the urban population lives in informal settlements, where most of the housing does not comply with construction codes. In many African cities less than 10% of the population lives in formal housing.
The formal housing market is not able to provide decent housing for everyone: government intervention is needed. In most countries, mortgage loans are usually limited to a maximum of 15 years and a 30% debt to income ratio. Therefore, an “affordable” house should cost between 3 and 5 times the mean annual income. In Sub-Saharan Africa, however, the average house costs 17 times the mean annual income.
The menu of policy options is varied. Governments can provide assistance through direct subsidies or tax incentives. They can use their regulatory powers to influence private sector decisions regarding the availability of mortgages; the type, the quantity and the legal tenure of housing (ownership vs. rental); the cost of building vs. renovating. Housing programs can be deployed nationally or through block grants that give local governments more autonomy. Local governments can launch housing programs and finance urban redevelopment with their own revenues or through the use of land value capture instruments. International experience shows that the menu of housing policy options is varied and adaptable to countries with different contexts, income levels, institutions, and cultures.
Property formalization is not a substitute for a comprehensive housing policy. The typical government response to rapid urbanization has been reflexive. Peru, for example, focused for years on regularizing land that was already occupied informally – a short-term solution to migration that, if not combined with other policies, can cause an array of long-term problems to local and national governments, such as congestion, insecurity, and financial challenges.