The value of squatter dwellings in developing countries

World B3ank Reprint Series: Number 243 Emmanuel Jimenez The Value of Squatter Dwellings in Developing Countries Reprinted with petrniis-ion from Lumonmn)icDezvlopinent anid Cultutral Clian,ge, vol. 30, no. 4 (1982), pp. 739-52.  World Bank Reprints No. 207. Gershon Feder and Gerald T O'Mara, "Farm Size and the Diffusion of Green Revolution Technology," Economic Devzelopennt anld Cultural Clhan,lc, and "On Information and Innovation Diffusion: A Bayesian Approach, "1American Journal of Agric-ultuiral Ecoolonomics No. 208. Michael Cernea, "Indigenous Anthropologists and Development- Oriented Research," Indigenows A nthropology in Nou-ledIerni Comll itri No 209. John R. Evans, Karen Lashman Hall, and Jeremy Warford, "Health Care in the Developing World: Problems of Scarcity and Choice (Shattuck Lecture)," New Eniglanid Journal of Medicile No. 210. George P,.acharopoulos, "Returns to Education: An Updated Interna- tional Comparison," Comyparatizve Education No. 211. Gregory K. Ingram and Alan Carroll, "The Spatial Structure of Latin American Cities," Journal of Llrlnw Economics No. 212. Hans P. Binswanger, "Income Distribution Effects of Technical Change: Some Analytical Issues," Souftli Ea7st Asian Economnic Rezviez7 No. 213. Salah El Serafy, "Absorptive Capacity, the Demand for Revenue, and the Supply of Petroleum," Journal of Energy aiia Devzelopmient No. 214. Jaime de Melo and Sherman Robinson, "Trade Policy and Resource Allocation in the Presence of Product Differentiation," Review of Econ1oml/iCs and Statistics No. 215. Mlichael Cernea, "Modernization and Development Potential of Traditional Grass Roots Peasant Organizations," Directions of Change: Moderni-Zatioll TFlcorli, Researchl, aniid Realities No. 216. Avishay Braverman and T. N. Srinivasan, "Credit and Sharecropping in Agrarian Societies," Journal of DeK'elopmewnt Econiomilics No. 217. Carl J. Dahlman and Larry E. Westphal, "The Meaning of Technologi- cal Master\' in Relation to Transfer of Technology," Anniials of the .nmerican A cadem il of Political anid Social Scienice No. 218. Marcelo Selowskv, "Nutrition, Health, and Education: The Economic Significance of Complementarities at Early Age," Jlournzal of Develop- mnent Econonucs No. 219. Trent Bertrand and Lvn Squire, "The Relevance of the Dual Economy Model: A Case Study of Thailand," Oxford Econiomiiic Papers No. 220. Gershon Feder and Knud Ross,"Risk Assessmentsand Risk Premiums in the Eurodollar Market," Joutrznal of Finaince No. 221. Bela Balassa, "Policv Rcespon.es to External Shocks in Selected Latin American Countries," Quarterlil Rezview of Fcwiou,ic> an1ld Buisiniess No. 222. Choong Yong Ahn, Inderjit Singh, and Lyn Squire, "A Model of an Agricultural Household in a Multi-crop Economy: The Case of Korea," Remew of Economnic, anditi Statistics No. 223. Emmanuel Jimenez, "The Economics of Self-help Housing: Theory and Some Ev.idence fr-)m a Developing Country," Jolurnial of Llr7an No. 224. Thawat Watanatada and Clell G. Harral, "Determination of Economi- callv Balanced Highway Expenditure Programs under Budget Con- straints: A Practical Approach," Transport Roe-erch for Social and Economiiic ProgresS  The Value of Squatter Dwellings in Developing Countries* Emmanuel Jimenez Uiniversity ol' Westernt Ontairio atd the World Bank I. Introduction A great proportion of urban dwellers in developing countries live in illegal squatter communities. Recent studies estimate that some 209c-30% of the population of the largest Asian cities inhabit so-called uncontrolled settlements. Similar figures obtain for African and Latin American cities, although over a wider range.' Despite the fact that they are frequently made of makeshift and dilapidated materials, do not have access to basic services, and are under constant threat of being razed by the government authorities, squatter dwellings, like those in the established legal (or formal) sector, are economic goods and can be characterized by a market value. Thus, given the relative size of the population that they shelter, any analysis of urban housing markets in developing countries which relied solely on statistics on the formal sector would most likely be misleading. Social scientists have begun to dispel the traditional notion that squatter housing units are more than temporary, valueless structures * I gratefully acknowledge the comments of J. M. Bamberger, F. H. Cummings, G. K. Ingram, D. H. Keare, K. S. Lee, J. C. Leith, D. Lindauer, J. F. Linn, and S. Margolis on an earlier draft. Special thanks are due to Professor Mila A. Reforma of the University of the Philippines and to the staff of the Research and Analysis Division of the Philippine National Housing Authority for designing and implementing the collec- tion of the data. I am a consultant to the World Bank. The views expressed herein are my own and do not reflect those of the World Bank. I Some estimates are as follows: Manila (22%), Jakarta (25%), Seoul (30%), Dakar (30%), Lusaka (27%,), Rio de Janeiro (27%). Mexico City (40%). It should be noted that the source of these figures, 0. F. Grimes (HousingfiJr Lois-Incolne Families [Baltimore: Johns Hopkins University Press, 19721), makes it clear that the definition of what con- stitutes a squatter community varies from country to country. We define squatter set- tlements as spontaneous (unplanned) agglomerations of dwellings whose residents do not hold title to the land. However, the residents may "own" the structures since they built them. , 1982 by The University of Chicago. All rights reserved. 00 1 3-007918213004-0008$0 1.00  740 Economic Dev elopment anid Cutltuiral Change which are shoddily built on vacant land.2 However, figures have not been documented and relatively little is known about this "informal" market. How much are these squatter homes worth? What determines the value of these dwellings? Does this market differ significantly from that found in the formal sector? These questions have important im- plications for policy measures, such as urban development projects, which are intended to improve the lot of the low-income urban popula- tion. This paper is intended as a first step in filling this gap in the litera- ture. Aside from presenting estimates on the value of squatter dwell- ings for a sample in the Philippines, we will also derive the statistical relationship between value and housing characteristics (such as the availability of certain services). The resulting coefficients can be inter- preted as the marginal prices of these characteristics. This exercise has some direct policy implications. In particular, the valuations of the dwelling units can be used to measure the implicit costs of housing projects which raze existing settlements to make room for dwellings with a certain set of characteristics. Also, if these valuations are indeed significant and are found to be consistent with physical measures of housing quality, then it is evidence that the official valuation of housing stock, based primarily on formal housing units, may be seriously underestimated. Further, the derivation of the determinants of housing value provides valuable price information about the implicit market for housing characteristics.3 As such, the resulting coefficients can be used: to control for price changes when value is used as a predictor of how housing quality changes over time; to gain some empirical insights into the benefits of providing certain housing characteristics. such as sounder building materials, running water, and sanitary facilities, in urban development projects;4 and as an initial step in estimating the parameters of the demand for housing characteristics.5 Prior to any estimation, we must first confront the primary prob- lem of all studies which require the value of owner-occupied dwellings-that of obtaining adequate data. The most accurate 2 See, e.g., Grimes; A. A. Laquian, Shlms Are fiw People (Honolulu: East-West Center Press, 1969): J. Perlman, lie T th vt l'Varna,wlitv (Berkeley: University of California Press, 1976). I Z. Griliches, ed., Price Indexe.s tnld) QualitY change (Cambridge, Mass.: Harvard University Press, 1971). 4 The view that an improvement in benefits will be partially capitalized in higher land and housing prices and the use of the hedonic techniques in obtaining benefit measures are complicated issues and are well discussed in the literature-see A. M. Polinsky and D. L. Rubinfeld, "The Long-Run Effects of a Residential Property Tax and Local Public Services," Joituntial o/ U'htitz Ec'onoinics 5 (1978): 241-62, for a partial bibliography. s As in A. D. Witte, H. J. Sumka, and H. Erekson, "An Estimate of a Structural Hedonic Price Model of a Housing Market," Econometrica 47 (1980): 1151-73.  Emmanuel Jimenez 741 estimate of value would be the sale price of the house at the time of purchase. However, the frequency of such transactions in studying the characteristics of a housing market in a neighborhood limits the use of such information. Moreover, because no official records are kept of any of these largely illegal transactions, it is difficult to obtain informa- tion on the sale price of dwelling units in squatter areas. One easily accessible estimate is that of the "owner" of the structure (but not the land). Indeed, even for the United States, many studies use the own- er's estimate of housing value (see Kain and Quigley for a list of such studies).f However, this procedure raises additional questions regard- ing the accuracy and possible biases of the estimates. A secondary goal of this paper, then, is to evaluate the reliability of the owner's estimate of the value of his or her dwelling. In particular, it will compare own- er's estimates with appraisal estimates and evaluate the results in light of two similar studies for U.S. data which concluded that, while errors of estimate (i.e., the discrepancy between owner and appraiser valua- tions) are quite large for individual properties, they are largely offset- ting for reasonably sized samples.7 II. The Data In 1978, the Tondo Foreshore area of Manila contained the Philippines' largest concentration of squatter dwellings-over 200,000 low-income individuals out of a total city-wide population of 1.2 million in a landfill area of 137 hectares. It was also the oldest and most established squat- ter community with a long and well-documented political history. The structures exhibited a wide variance in terms of quality-makeshift homes of scrap metal could be found not far from those made of con- crete and brick. However, they all shared a legacy of illegality and lack of services. Since then a World Bank-financed urban development project has legalized the residents' status. This project is meant primarily to provide basic services and tenure to the community. A monitoring and evaluation effort by the Philippine National Housing Authority's Research and Analysis Division (RAD) is gathering de- tailed housing information on 96 households (randomly selected from the Tondo through stratified samples) as subjects of a house- consolidation study. Designed to eventually determine the extent and the speed of' house-upgrading activities, this data set provides informa- tion on the initial (i.e., before project implementation) housing con- ditionc of the households. This includes estinmates of the value of each 6 J. Kain and J. Quigley, "Owner's Estimate of Housing 'v'alue." Joiurna(l o/ I/h' Atneri(an Stati.stical A.sscuialion 67 (1972): 803-6. ; Ibid.: L. Kish and J. Lansing, "Response Errors in Estimating the Value of Homes.'' Journlttl o the' Ame'rican Stati.stical As.so( ilfion 49 (1954): 520-38.  742 Economic Dev,elopment and Cultutral Chantge house by various appraisers as well as measures of its characteristics. It is the primary data source for this study. As stated in the Introduction, the informal housing market, by definition, operates in a world which is beyond the scrutiny of con- ventional government activity. Since data and tax collection agencies do not enter this world, legislated restrictions such as minimum ser- vicing requirements for housing are irrelevant. It is thus not a trivial task to study the market for squatter dw.'ellings when selling prices are not recorded. In the absence of these recorded prices, the National Housing Authority's RAD was very resourceful in obtaining informa- tion on altemative measures of housing value.8 Heads of households were asked by interviewers "How much do you think you could sell your house for?" For the 96 (out of 100) who responded, this figure is interpreted to be the owner's own valuation of the structure. A local professional appraiser-engineer was then hired to valuate the same dwelling units. Only one appraiser was used. A third potentially useful measure had to be disregarded for this study. The five most proximate neighbors were asked how much they thought the dwelling unit in question was worth. Unfortunately, the only figure available for this study was an average in which the upper extreme was dropped for each dwelling unit, thus seriously underestimating the results. III. The Value of Squatter Dwellings The housing value estimates are summarized in table 1. The owner's assessment is 14,145.83 pesos (US$1,886) on average for the 96 households, which is not significantly different from the appraiser's average estimate of 14,092 pesos (US$1,879). The first observation is that, contrary to what one might expect, these households do not live in hovels which have little value. Since average annual income in Tondo is about 7,400 pesos (US$982), the average appraised value of the house is about 90% greater than the average annual income per capita from regular sources, a significant amount which is not much different from the U.S. figure of 85%.9 This is partly attributable to the fact that Tondo is an established community, even though it has only recently become legal. Also, among squatter communities, the Tondo dwellers appear to be slightly better off. Most of its workers are em- ployed in the port area or in Manila's biggest market area. Still, the relatively high valuations tend to substantiate the notion that many 81 Data from developing countries are notoriously unreliable. However, the data gathered for this analysis were collected scrupulously. The same households were also the subjects for RAD's income and expenditure survey, in which households recorded their incomes and expenditures daily under the supervision of an interviewer. These interviewers then built up trust within the cornmunity and were also used to administer the house consolidation surveys. I Kain and Quigley.  Emmanuel Jimenez 743 squatter dwellings are more than makeshift and temporary.'0 This has important implications for the cost side in the economic evaluation of a project which razes squatter areas. The mean value owner and appraiser estimates are almost exactly the same. In fact, they are not statistically distinguishable even at the strictest confidence levels. The Pliilippine sample does well when com- pared with Kain and Quigley's results for St. Louis differences in aver- age valuations. The conclusion, then, is that, on average, owners val- uate their dwellings consistently with valuations obtained from ac- cepted appraising practices. For individual estimates, the results are rather different. The aver- age of the absolute value of the differences between owner and ap- TABLE I COMPARISON OF INDEPENDENTLY APPRAISED HousirnG VALUES WITH OWNER ESTIMATES Kain and Quigley 1972 Kain and St. Louis Quigley 1972 Study (All St. Louis Owner- (Single Philippines occupied Detached 1979: Homes) Homes Only) 1. Average appraised values (N .C,) ($) . 1,879 14.431 143719 2. Average owner-estimated values (N A ,) ($) .......................1886 14,473 14,488 3. Difference (row 1-row 2) ............... -7 -42 +231 4. % difference (rou 3 -row 1) ..............-.4 -.3 + 1.6 5. Absolute value of difference ( IC, - o,) ............... .. 1..1027 3,058 2,825 6. Absolute value of difference as a S4 of mean appraised value (row 5-row I) 54.6 21.2 19.2 7. Pearson correlation coefficient .77 .87 .84 8. Spearman correlation coefficient .78 ... ... 9. Sample size .......................... 96 113 83 NOTE.-C, = CONSVAL, = value of the ith home as estimated by consulting professional appraiser. 0, = Ol.WRIA 1., = value of the ith home as estimated by the owner of the ith home. Table I figures converted to U.S. dollars at US$1.00 = 7.5 Philippine pesos. '