The Function and Credibility of Urban Slums: Evidence on Informal Settlements and Affordable Housing in Chile

Abstract

In recent decades, governments and international organizations have made strong efforts to promote homeownership among low-income households. However, in many countries, informal housing arrangements persist. A strong reason for this is emphasized in the “credibility thesis” which posits that informal settlements play a functional role and serve informal dwellers by supplying other valuable attributes that formal housing may not provide. Based on a comprehensive survey of 1,588 households living in 69 irregular settlements and 32 subsidized housing projects in Santiago, Chile, we analyze the functionality of informal settlements by examining two hitherto under-researched indicators for credibility: residents’ perceptions on location and neighborhood security. Results show that in the low-income housing sector some individuals may prefer to live in an informal settlement because these places are more functional with respect to some relevant urban attributes to which they give more weight. In effect, households living in informal settlements are less willing to move from their current municipal district, are closer to jobs, and report lower rates of neighborhood vandalism relative to those living in formal subsidized housing projects. This is related to the fact that in Chile many individuals who have had access to affordable housing have moved to segregated urban areas. The results show that even within well-functioning urban areas where there is strong protection to private property rights, urban informality may still provide a better geography of opportunities than formal homeownership.

Keywords: property rights, slums, informality, affordable housing policy, urban renewal, credibility theory

JEL Classification: K11; K23