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Six words to AHI’s philosophy: Part 3, formalize informality

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By:David A. Smith

 

[Continued from yesterday’s Part 2 and the preceding Part 1.]

 

As I had shown so far in my fifteen minute talk at the World Bank’s Fifth Global Housing Finance Conference in Washington DC (here’s the full presentation, link in pdf), informality is the norm in rapidly growing global-south cities.  So we underwrite informality, because otherwise we have excluded too much of the market.  And we underwrite durability, because that is what makes real estate collateral distinct from chattel.  That leaves one final step:

 

Informal but legal: gecekondu, Istanbul

 

Formalize informality

 

This injunction goes not to private MEEs but to government, because formalization being a legal status can be conveyed only through some form of government imprimatur. 

 

[Though I haven’t investigated, I strongly suspect that formalization didn’t matter in the pre-governmental period of urbanization, say before 1800, because there was no real estate mortgage finance.  Land cadasters existed, and land registries recorded property transfers, but nobody mortgaged built property. – Ed.]

 

In the real world, we don’t need anybody’s permission to build property on land we occupy.

 

“We’re building a house”

 

Permission becomes relevant only if the neighbors have valid zoning grounds to object, when we come to sell the property, or if we need to finance it.  If we can build with hard equity, then we build with our own labor and found or scavenged materials.

 

Informal becomes formal: self-built housing, Austin, Texas

 

The photograph above is informal housing in America – outside Austin, Texas to be precise – where a colonia is becoming part of the American urban landscape.  Go me this photograph speaks volumes:

 

  • The hand-painted address (A. Martinez, Lot 2, High Ridge Road, Del Valle, Texas) signals connection to the city’s information-delivery network.
  • The signboard points to the Yellow Brick Road TO OZ, Frank  Baum’s metaphor of both urbanization and wealth (a simple metaphor echoed a hundred years later in The Hunger Games).
  • The picket fence which asserts property rights.  (People are primates; we claim and mark our territory.)
  • The house itself is small, visibly self-built, and not going anywhere.  It’s durable.
  • The American flag, a badge of loyalty to an adopted country.

 

The picture demonstrates work, commitment, incumbency, and hope – everything we want in citizens, and further proof that homeownership changes behavior for the better.

 

How then can the Del Valle house and others like it become formal?  Are they forever stained with an original sin, or is there a path of redemption?  The answer lies in enumeration, which as I’ve posted before is a community-based connection to the formal government

 

House by house, a census done by the poor themselves, then accepted by local government.

 

The questions are simplicity themselves.

 

Age of the owner.

How many families stay in your house?

How many people live in your house?

How many people in the house attend school?

 

I feel as if I am looking back in time at the 1790 US census, where the brand-new nation counted itself, and gave its citizens legal recognition.

 

As of August 2, 1790, America looked like this

 

In the same way, enumeration – observation by reliable first-hand observers, then converted into written records accepted into the legal registration system – validates and legitimizes the facts on the ground.

 

What a difference a day makes!

 

The house above was informal at nine o’clock in the morning, and by twelve noon it had been formalized. 

 

Is that housing formal or informal?

 

Thus, when I asked the World Bank audience, is this housing formal or informal, I was posing  a trick question.  Looking at the photo, one cannot tell whether the home is formal or informal.  It is just a home. 

 

A room is a room is a room, after all

 

Does the home’s formality status influence its value?  Not in occupancy – the owner still derives the benefits of security of tenure and controllable occupancy cost – but in market and money terms, absolutely, because formality brings access to finance.

 

Urbanization requires formalization

 

For cities to grow, therefore, they have to formalize their informal neighborhoods.  No government in history has prospered by seeking to stop urbanization.  No government has ever waved its magic wand and made the informal neighborhoods disappear.  Even the Homestead Act, as Hernando demonstrated in The Mystery of Capital, represented not so much a grant by government as a shrewd acknowledgment of facts on the grounds and a gracious reward for loyalty to a Union undergoing a civil war.  And it was also earned amnesty:

 

The new law established a three-fold homestead acquisition process: filing an application, improving the land, and filing for deed of title.

 

Any U.S. citizen, or intended citizen, who had never borne arms against the U.S. Government could file an application and lay claim to 160 acres of surveyed Government land. For the next 5 years, the homesteader had to live on the land and improve it by building a 12-by-14 dwelling and growing crops. After 5 years, the homesteader could file for his patent (or deed of title) by submitting proof of residency and the required improvements to a local land office.

 

There’s the perfect expression of formalization: live on it, improve it, work it, and then get title.  And be a good citizen.  In that same sense, the South African enumeration is likewise a combination ratification of facts on the grounds and expression of arrival.

 

If formalization is inevitable with urbanization, why then does it not happen faster?  Partly because of scale and speed – the half-century we now experience is unprecedented in human history.  Partly it’s because government expects the poor to formalize themselves, or to pay for their own formalization. 

 

Jardim Iporanga, Sao Paulo, Brazil: fully informal

 

When we think of policies aimed at helping the poor, we tend to treat formalization as something the poor should just automatically do, and we tend (even if only subconsciously) to presume that the poor’s failure to formalize is willful, as if they are choosing to spite the system.  Yet far more often than otherwise, the poor fail to formalize their housing because they cannot afford to do so, for any of these reasons:

 

They can’t navigate the land formalization registries (77 distinct steps in Egypt).

They can’t afford the time (most of those 77 steps have to be accomplished in person).

They can’t pay the filing fees.

They can’t afford to renovation/ reinforcement need to meet the formal building codes.

 

All these things cost money, which you and I tap with our access to formal credit.  If the poor can’t access credit, they can’t pay the costs of formalizing their property, and they get stuck beneath the formalization curbstone.

 

We need to facilitate them getting up the steps

 

That’s why we at AHI are pioneering Home Asset Loan Finance (HALF) and similar financial products, to bridge property from informal to formal.

 

HALF addresses a gap in housing finance

 

HALF fills that gap – a property that is informal is financed as durable value, and with the goal of improving its durability, hence its longevity, and thus a greater likelihood of being legally formalized.

 

HALF products: SEWA Grih Rin

 

The HALF financial products shown in the simple 2×2 box above are aimed at enabling people who have durable informal housing to upgrade their site and property infrastructure, and to upgrade their homes’ interiors.  Simple things, to be sure, yet each one makes an enormous visual and psychological difference. 

 

Ideally, therefore, HALF products are used in conjunction with a government program, like Ahmedabad’s slum upgrading program Parivartan, that greens the brown spaces.

 

Jadibanagar, Ahmedabad: public space improvement of a fully informal neighborhood

 

Parivartan funded street grading (for water runoff), paving, street lights, electrical meter hookups, and some modest greenery, all for $400 per household, of which the residents paid 10% and the city paid the rest.  The result is a huge leap in public sanitation, and a corresponding boost to homeowner reinvestment in their homes – even though the homes are not yet fully formal. 

 

As I’ve written elsewhere, and will eventually pull into a proper essay, HALF is neither microfinance (the insect) nor mortgage finance (the airplane). 

 

Insects have an aviation and structural model that has a natural cap on size; anything larger than the king dragonfly and the cube-square ratio means it’s too heavy to fly.

 

Airplanes have an aviation and propulsion model that has a natural size minimum; anything small and they can’t carry the weight of a person.

 

If all you knew of aviation came from your study of insects and airplanes, you’d conclude the intermediate range impossible, and yet there’s a whole species of creatures that spans it: the birds.  (Indeed, birds too have a minimum flying size, the hummingbird, and a maximum flying  size, the great condor).

 

We need a really big insect

No, we need a really small airplane

 

Now all the pieces fit together. 

 

We have a theory of urbanization – private investment outruns public infrastructure, and the result is an informal settlement or a slum.

 

We have a theory of formalization – physically durable housing eventually houses communities of people, not isolated strangers, and reaches a moment when existing property has to be grandfathered.

 

We have a theory of transformation – use HALF loans to enable people who have durable-but-informal housing to improve it to the point of eventual formalization via enumeration or a similar ‘earned amnesty.’

 

Put them together and we have a grand unified theory of urban slum upgrading:

 

Underwrite durability

Formalize informality

 

At AHI, this is what we do.


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