A month ago, at the World Bank’s Fifth Global Housing Finance Conference in Washington DC, I delivered (link in pdf) what may prove the most significant talk I’ve ever given.
Six words and then some
The talk was important not precisely for its content, although that will be the subject of this multi-part post, but rather for a moment of inspiration. As I sat on the podium waiting for my turn on the (extremely good) panel, for the first time I wrote down the magic six words that may just represent a grand unified theory of improving slums and informal settlements:
Underwrite informality
Underwrite durability
Formalize informality
Put them together and they describe a course of action that brings together all of AHI’s thinking about housing, urbanization, and slums.
If you remember nothing else, remember these
Though on the panel itself time permitted me to hit only the highlights, here in the quiet blog we can connect all the elements.
1. Underwrite informality
Introducing the concepts
Rock, said our tour guide of the Fiery Furnace section of Arches National Park, is always coming or going; it’s never static. Stone is always being weathered.
Rock going?
A millennium of Scottish weather will do that to rock
Or rock emerges out of pressure and time.
I’m afraid that’s no longer wood
In the same way, the formal is always becoming informal, and the informal is always becoming formal, and those two states are not Aristotelian absolutes, but shades of gray where the dividing line between them is more arbitrary, and less observable, than we normally think.
Where’s the white paint? Where’s the black?
Most of the conference dealt with mortgage finance, because after all most of the world’s housing finance is predicated on mortgages, which are indeed an excellent invention. When braided with title registries and building codes, they enable homes that are used and occupied as personal assets to be financed and refinanced on a consistent, scaled basis. Linking capital, the fastest asset, to immovable real property, the slowest, is indeed a fantastic achievement, and a global financial engine that increases capital velocity and liquidity and in so doing grows economies.
At the same time, mortgages won’t get the job done for any emerging nation. Most of the world’s housing is informal, and the rate of informality is growing much faster than the rate of formalization.
A formal definition of formal housing
All that informal housing is unreachable by mortgage finance.
Is this financeable? Durban, South Africa
For that matter, most of the potential buyers of newly formalized housing are informally employed.
Woman mason laying curbstone: Delhi
Both informal employment and informal urban housing are skyrocketing because we are entering the century of cities, with millions upon millions of people moving to cities for better lives for themselves, their families, and their children. As a result, urbanization is happening faster than any government can cope with it, and as a result, private investment outruns public infrastructure.
The result, as natural as it may be, is that fast-growing cities grow slums:
All growing cities have informal neighborhoods: ‘slums’
As I’ve written at length elsewhere, slums are economically rational: they come into being when people move to the city for the entirely rational purpose of boosting their income, and then need a place to sleep at night, however mean that place may be. Their rural-to-urban immigration triggers housing demand, and naturally there is a private market to fill that demand, so in slums, private investment outruns public infrastructure. This has happened throughout the world’s history – Ostia had slums and SROs, as did Pompeii.
One-room apartments, Ostia, first century BC
Closer to our own era, Victorian London had slums, as did Boss Tweed’s Hell’s Kitchen.
Slums of Manhattan, scarcely 100 years ago
This mismatch creates a world where the normal ‘formal’ power structures are inapplicable – for many reasons, the formal city wishes to pretend the slum does not exist – and within the slum arises these alternative power structures. Indeed, it was precisely because there were slums that ward bosses like Tweed were able to flourish, for they provided municipal services informally that the city itself would not provide formally.
But are slums good or bad?
Is a slum good or bad?
Slums are an inevitable phase cities grow through
As the comparison shows, slums have plenty of drawbacks: they are overcrowded, overly dense, with inadequate water and sanitation, so as a result they are unhealthy, especially for children. They are also havens of crime, and places where wealth is extracted rather than reinvested.
Formal becomes informal: additions are inevitable, and self-designed
At the same time, slums are spontaneous communities. People make their own informal cities so that they can live close to the formal city and its wealth. They’re incredibly lively places, ever-changing, and incubators of new businesses.
Meanwhile, the more I work with housing globally, the more it becomes clear that what we call formality in housing, and take for granted in our documentary and record-keeping system, is tolerant of varying degrees of informality. A backyard deck over-reaches the setback requirements.
A finished basement being rented as an in-law apartment despite having only one means of egress or ceilings too low for the building code.
Backyard shacks in Joe Slovo Park, Cape Town
The lot line doesn’t exactly conform to the survey, and that fence wanders through a corner of our neighbor’s lot, though neither he nor we realize it. Our friend the electrician did some rewiring on the third floor and never [pulled a building permit, though he said he would. Though I’ve never done an exhaustive house-by-house check, I have a hunch that maybe a third of all the homes in Cambridge would be ‘informal’ if anyone ever cared to look at every jot and tittle of the law.
Otherwise known as dotting the I’s and crossing the T’s
We and everyone else tolerate these minor variations from the legal requirements, because in truth they probably are de minimis and neither threaten health/ safety nor intrude on our neighbors’ or community’s wellbeing. They’re not fully formal, but we think they’re formal, and so does everybody else.
I exist if you believe I exist
That isn’t so different from most of the world, where informality is far more prevalent and tolerated than is formality. What matters is not whether the housing is perfectly formal, but whether it can be financed. In turn, that means essentially that a lender will provide capital against that house as collateral, with either a mortgage or some other form of security instrument or protection.
We’re already demonstrated that housing is a different asset class from other consumer goods, because you can’t move it. You can abscond with your car, your stereo, your jewelry, your valuables, your money and your loved ones – but you can’t abscond with your home. Formal or no, it ought to be underwritable, and in fact housing is globally underwritten even if less than perfectly formal – depending on the next criterion.
Are these people underwritable? SEWA Bank, Ahmedabad, India
[Continued tomorrow in Part 2.]