The introduction of land titling programs to the informal land market seemed to offer a magic solution to the problem of poverty in third world countries. Various governments breathed a sigh of relief, as the struggle to reduce poverty would no longer require the complex and stressful income redistribution measures that always cause conflicts between social groups and classes. According to this magic formula, all that was required was for informal urban dwellers (about 50 percent of the population in the major cities) to formally register their properties and thus gain access to title deeds, so they could obtain mortgage loans from private banks. Their titles and newfound access to loans would enable them to increase their real estate capital, improve their homes and develop small businesses (de Soto 1986; 2001).

To put this hypothesis to the test, and at the request of Perú’s National Institute of Statistics and Data Processing (Instituto Nacional de Estadísticas e Informática–INEI), I conducted a study of the official real estate registration policy under which more than one million title deeds were conferred in Perú between 1996 and 2000. This policy was implemented by the Commission for the Official Registration of Informal Property (COFOPRI) and the Real Estate Registry of Urban Settlements (RPU). As stated in Perú’s Law Decree 803 of March 1996, the purpose of this policy was to establish a formal relationship between the distribution of land titles, access to formal credit mechanisms and better standards of living. Based on information provided by National Household Surveys (ENAHO) for 1998 and 1999, conducted by INEI, my study analyzed data on housing that either was acquired through invasions or other illegal means and did not have property titles or had obtained titles from COFOPRI through the regularization process. The data base consisted of 913,335 units in 1998 and 1,033,480 in 1999, out of a total of 3,572,091 urban housing units for both years. The financing obtained for housing expansion and other domestic expenses was used as an indicator to determine the access to credit, whereas the structure of the dwelling and the supply of basic services were used to determine standards of living.

Those who advocate the regularization of property in Perú argue that property titles should be granted on a large scale by recognizing informal occupation (that is, legalizing land ownership), awarding registered land title deeds, and thus establishing the links needed to gain access to formal credit mechanisms. Official registration is the legal procedure whereby actual rights to a property result in legal ownership. A particular characteristic of this procedure is the firm resolve to establish connections between the legalization of land and property and the access to mortgages through the private banks. As described by the Path to Property Association, an organization dedicated to promoting these policies worldwide, the basic philosophy behind the formal registration process is that prosperity in countries with market economies is largely achieved because those societies have adequate property systems that enable their markets to operate through exchangeable ownership rights in a wide-ranging market.

To grant landowners indisputable proof of ownership and protect them from fraud and uncertainty ownership rights must be standardized, and universally accessible exchange instruments must be registered in a central government system by legal norms and regulation. Consequently, through the official registration of property, the “energy” of the informal sector can be channeled toward organized and prosperous market economies. From this perspective, informality is merely the inability of governments to make their laws coincide with the real circumstances under which people work and live. Nevertheless, this viewpoint fails to reduce a complex phenomenon to its legal dimension and neglects its economic aspects.

Land Titling Policy and Outcomes

To speed up the distribution of land titles and to avoid troublesome formalities, COFOPRI took over this responsibility from the municipalities. The World Bank supported this policy, granting COFOPRI a US$38 million loan in December 1998. Between 1996 and 2000, 1,134,000 duly registered land title deeds were awarded: 645,165 of them in Lima, 112,631 in Arequipa and 74,180 in Trujillo (the first, second and third largest cities in Perú, respectively). In terms of the distribution and registration of land titles, the success of the formal registration policy is undeniable. However, the fact that municipalities were removed from the process is questionable, since their legal role in the urban system was undermined.

A close connection between the official registration of property and the standard of living was observed in Lima after the policy was implemented. Between 1998 and 1999, regularized (formerly illegal or informal) housing in the capital city showed improved construction of walls, floors and roofing; however, the nonregularized housing units also had improved construction of walls and floors. In the rest of the country, informal housing in urban areas predominates over regularized housing.

While regularized housing units outside Lima increased from 17,929 to 48,869 between 1998 and 1999, the number of units still without property titles increased from 371,005 to 392,436, indicating the persistence of invasion mechanisms. The gaps between different types of improvements on regularized and informal houses outside Lima increased between 1998 and 1999 for most categories (see Table 1).

Looking at the relationship between official land titles and access to credit, the study found that of the 70,725 houses in Lima awarded land title deeds by COFOPRI in 1998, about 23,965 (34 percent) of those homeowners gained access to varied types of financing, such as loans from banks, lending agencies or family members, to improve or renovate their homes. In 1999, the owners of about 23,804 (18.3 percent) out of a total of 129,588 titled houses obtained such financing. Although there is no official information on how many homeowners applied for credit and were denied, this result proves that officially registered households that gain access to loans are a minority and, in fact, the number has decreased. This situation is explained by complex factors including the economic recession, the default rate of 10 percent on private bank loans, fear of giving loans to lower-income sectors, and fear among these residents of mortgaging their houses and land.

Similarly, the number of bank loans to already titled landowners in Lima decreased from 12,750 in 1998 to 8,993 in 1999. In contrast, the use of own resources to finance housing improvements rose from 12,282 in 1998 to 14,811 in 1999. Not only is a larger majority spending their own funds on housing, but they are facing more difficulties in gaining access to credit institutions, despite the formal registration of their properties. A study by COFOPRI-DESCO (Riofrío 2001) identified several characteristics of those who are willing to take mortgages:

• Stable nuclear families;
• Both husband and wife are wage-earners;
• Entrepreneurial mentality and willingness to take risks;
• Have self-owned businesses (microbusinesses, taxis, etc.); and
• Have information on the use of the Urban Land Registry.

Of the 12,750 households officially registered and regularized in Lima in 1998 that also received bank loans for renovations and improvements, 52.6 percent obtained their loans from the Banco de Materiales and 47.4 percent from the National Construction Company (ENACE). In 1999, 8,993 officially registered and regularized households received loans for renovations and improvements, 7,593, or 84.43 percent from the Banco de Materiales and 15.57 percent from the ENACE. Since these are both public entities that grant subsidized loans (at the same annual interest rate of 7 percent), there is no connection between the official registration of property through regularization programs and access to loans from private banks.

With respect to seeking financing for other kinds of household expenses, only 11,323 (8.7 percent) out of a total of 129,588 households registered in Lima in 1999 resorted to any kind of financial assistance. Since no public entity provides loans for these expenses, most households receive money from friends and relatives (47 percent) or other sources such as lending agencies (25 percent). Only 28 percent of these 11,323 registered households gained access to loans from private banks for household needs.

In other urban areas, the situation of officially registered households is different from Lima’s experience. In 1998, the use of the households’ own funds for housing improvements predominated over bank loans (78.7 percent compared with 21.2 percent), whereas in 1999 bank loans predominated over own funds (51.3 percent compared with 42.9 percent). In 1998, all of the loans were public loans granted by Banco de Materiales, and 93 percent were from that source in 1999. With respect to loans for other household expenses, 6,163 (13 percent) of the total of 47,302 households officially registered during 1999 received some financing. Of this small group, 45 percent received financial assistance from lending agencies and other sources, 34 percent from friends and relatives, and 21 percent from their employers or work centers. None of them obtained funds from private banks.

Conclusions

The study yielded the following conclusions with regard to the relationship between official registration of titles and access to credit:

• In general, and despite the increase in the number of properties regularized between 1998 and 1999, access to loans decreased during that period, coinciding with the economic recession and related problems affecting private banks.
• The use of personal resources predominates over bank loans as a source of funds for the expansion of both regularized and informal housing. Loans for other household expenses are obtained mainly from relatives and friends, followed by private banks and informal lending systems. Lower-income families primarily use their own funds or those of social networks for improvements to both regularized and informal housing; resources from formal public or private institutions are secondary.
• Surprisingly, informal households gain more access to loans from private banks than do regularized households. For example, in 1999, 100 percent of loans for improvements to housing units regularized by COFOPRI in Lima were public loans, thus none received private loans, whereas 28 percent of nonregularized housing units did obtain private loans. This suggests that the eligibility criteria used by private banks is based on job stability and fixed monthly income, rather than on land tenancy. The information obtained from ENAHO shows that in 1998, 25 percent of families living in informal dwellings earned about US$747.50 per month. This is the equivalent of “6 to 7 minimum monthly wages,” a frequently used measure for salaries for lower-income sectors in Latin American countries. In contrast, only 12 percent of families living in officially registered properties regularized by COFOPRI earned a comparable salary. This paradoxical situation, whereby title holders do not have access to private banks, while those without titles have higher incomes and better access to loans, may be explained by the fact that COFOPRI, seeking to grant a large number of titles quickly and to create political impact, concentrated its efforts in newer, fragmented neighborhoods where it was easier to identify the landowners. In contrast, COFOPRI tended to ignore older and more close-knit neighborhoods where it was harder to identify the owners due to the presence of multiple generations living under the same roof.
• In the case of both regularized and informal properties, the main sources of loans were public entities that grant subsidized loans (i.e., Banco de Materiales).

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Thus, there is no direct relationship between the number of title deeds handed over to informal dwellers and their subsequent access to loans from private banks. This conclusion was confirmed when the transition government that succeeded former President Fujimori (1990-2000) revealed in 2001 that only 12,388 mortgages had been recorded in the RPU throughout the country, which is equivalent to only 5 percent of potential beneficiaries. Although registration facilities may be useful, they are certainly not sufficient to increase access to credit. Effective policies require an in-depth study of a number of different factors, including:

• The policies on which private bank loans are based. Discriminatory policies (redlining, etc.) are prevalent in Latin America, as in the U.S.
• The popular credit culture, particularly as regards poor people’s fear of losing their property (which is virtually their only asset), as well as the lack of understanding of concepts of property titles, credit and even banks. It’s important to study the patterns of cultural inertia that are put to the test by this type of policies and consider the opportunities for education that could facilitate these processes.
• The reluctance of people to register their properties and use the registries. The intention of this article, and the research behind it, is not to minimize the importance of policies aimed at facilitating access to credit by the poor by means of regularization programs. On the contrary, such policies are important and should be stimulated, although we would not suggest urban poverty can be resolved exclusively through this means. For the system to improve, it is essential to have a better understanding of the credit system and the popular credit culture, as well as to develop financial assistance programs that address the current resistance to the use of mortgages by both the poor and the banking sector.

Julio Calderón Cockburn is a sociologist and a Ph.D. candidate at the University of San Marcos in Lima, Perú. He has written many books and articles published in the Americas and Europe, and he currently works as an independent consultant and university professor. He is a faculty associate of the Lincoln Institute, which supported the study reported here and other research and teaching projects in the past. Several of his written works are available on the Lincoln Institute website in the Latin America section under LAC Papers (www.lincolninst.edu).

References

Calderón Cockburn, Julio A. 2001. Comparative analysis of the benefited and non-benefited population by the national formalization plan. In Has the well-being of the population improved?: A balance of the main social policies and programs. Lima: National Institute of Statistics and Data Processing (INEI): 65-92. de Soto, Hernando. 1986. The Other Path. London: I.B. Tauris & Co. Ltd.

_____. 2002. The Mystery of Capital. London: Bantam Press.

Fernandes, Edesio. 2002. The influence of de Soto’s The Mystery of Capital. Land Lines 14 (1): 5–8.

Riofrío, G., J. Calderón y M. Zolezzi. 2001. Estudio sobre cultura registral. Lima: COFOPRI-DESCO. Agosto.

Land and housing markets, and any other market for that matter, can be approached as arenas in which persons exchange rights to assets subject to constitutional rules, statutory and common law rules, and administrative rules and procedures. The value of land is often believed to be determined by expectations about what land uses will be legally permitted over time and the return from such uses. However, there is substantial evidence, international as well as U.S.-based, that markets and prices are also shaped by expectations about what is legally prohibited yet is nonetheless achievable through extra-legal or illegal means.

Scholars since Jeremy Bentham have linked markets and their viability to a legal regime of property rights which clearly defines, safeguards and facilitates the transfer of such rights through legal means. How then do we explain illegal or extra-legal property transactions: the buying and selling of stolen goods; subdivision of single-family houses into one-room rentals; and squatter settlements.

In all these contexts, assets are being acquired and used, hence there is property. There are also markets, frequently thriving, to exchange such assets. What is absent from these markets are legally defined rights. Their absence, however, does not prevent these markets from emerging and affecting supply and demand in the legal market. It is crucial, therefore, that such markets be understood, not just as an exotic feature of the developing world, but as alternatives to which actors in the market turn under certain conditions.

What happens if property rights are not clear, are contested or are not well enforced? Policy advisors rarely address this question, not because they fail to see that property regimes are frequently lacking in stability and security, but rather because they see their function as one of putting in place the ideal set of laws, regulations, and administrative and enforcement mechanisms that would guarantee stable expectations, secure rights and efficient markets (see Figure 1).

The only problem is that putting in place such laws and regulations rarely happens in a vacuum. Rather, it happens in a landscape of existing interests, entitlements, conventions and practices. It is the interaction between these new interventions and existing norms and practices that determines who is able to do what with which assets in society. Three examples illustrate my point.

Farm Restructuring in Eastern Europe

Until the late 1980s, farmland in Eastern Europe was organized within state farms, collective farms, or, in some cases, small private farms owned by farmers who had the right to cultivate but not sell or develop the land. The absence of competitive agricultural and land markets prevented many necessary adjustments from taking place: labor mobility, adjustment in farm sizes, incentives to invest or increase labor productivity, and moving land to better uses.

Some policy advisers have argued that unless the New Independent States establish family-based farms with legally, well-defined and well-protected private property rights that can be transferred easily, little can be done to promote necessary adjustments. How do farmers adjust to the new realities of the transition while constitutions are amended, laws are promulgated, cadasters are compiled and land registers are established?

The answer lies in short-term informal leasing, which is the most common land transaction in Eastern Europe for several reasons. First, informal leases occur mostly between neighboring farmers who know each other and the quality of the land being traded. Second, most leases are short-term, allowing farmers to reduce the uncertainty associated with long-term commitments in inflationary and politically unstable environments. Finally, short-term leases allow farmers to adjust their farming units, which speeds up the economic restructuring of the farming sector. Farmers conduct these short-term transactions not because they are legally permitted but because of norms, conventions and local networks.

Squatter Housing in Developing Countries

Conventional wisdom on squatter housing in developing countries has been that lack of tenure security is responsible for the poor quality of housing in these settlements. Granting legal titles, the argument goes, would provide the necessary security and unleash household savings into investment in better housing. Recent empirical work, however, suggests that legal title is neither necessary nor sufficient for tenure security to exist.

Furthermore, absence of land title does not prevent squatters from renting or selling their houses. Indeed, except when an eminent threat of eviction exists, informal markets evolve to reduce the uncertainty associated with illegal transactions. Rules and arrangements evolve over time to provide information about who owns what, enforce contracts and resolve property disputes. For example, neighborhood associations in Brazilian favelas maintain an informal register of residents and issue documents as proof of ownership. Middlemen and land subdividers in Jordan play a crucial role in finding buyers and even financing them. These roles substitute for, duplicate or manipulate the legal system that functions in formal markets.

Illegal Housing Conversions in the U.S.

A recent series of articles in the New York Times documents the surge of illegal apartments throughout the City of New York in response to continuing poverty and the dwindling supply of affordable housing. In Queens, for example, one- and two-family units are being converted into multiple apartments, turning even attics and basements into makeshift flats.

These apartments are not registered with the city and are, therefore, not regulated. Firefighters estimate that as many as 80 percent of the homes in Queens are illegally subdivided. Needless to say, landlords, tenants, developers, brokers and contractors operate in these markets. They rely on evading, manipulating, and breaking laws and regulations to allow these markets to function. By necessity, they also have to rely on extra-legal means to enforce some of their contractual arrangements or resolve their disputes.

An Alternative Model

To understand how land markets operate, we need a “lens” that captures a wider array of rules and market arrangements. We need to examine not only what constitutional, statutory and common laws permit, but also what social norms and conventions permit. We need to go beyond property rights to include the range of property interests that are not necessarily based in law. We also need to go beyond the formal means of contracting and enforcement to include informal means based on ethnic, territorial and associational networks. This approach amounts to an alternative framework (see Figure 2) for understanding market actors’ expectations about the ability to use, develop, transfer and derive income from land.

The wider lens approach to market institutions also allows us to shift emphasis from institutional forms to institutional substance. The important question is not whether a particular institution (such as a land registry) exists, but rather how information about land and housing markets is provided, how risk is reduced, and how enforcement is made effective.

Omar Razzaz is Ford International Assistant Professor in the Department of Urban Studies and Planning at Massachusetts Institute of Technology. He previously worked at the World Bank on property rights under transition in Eastern Europe, the Middle East and Africa.

References

Bruni, Frank, with Deborah Sontag. “Behind a Suburban Facade in Queens, A Teeming, Angry Arithmetic,” The New York Times, October 8, 1996, p. A1.

Razzaz, Omar. “Contestation and Mutual Adjustment: The Process of Controlling Land in Yajouz, Jordan,” Law and Society Review 28, no. 1. 1994.

“Examining Property Rights and Investment in Informal Settlements: The Case of Jordan,” Land Economics, November 1993.

World Bank, “Regional Study: Farm Restructuring and Land Tenure in Reforming Socialist Economies: A Comparative Analysis of Eastern and Central Europe,” 1994. Prepared by Euroconsult/Center for World Food Studies, Washington, DC.

The annual rate of urbanization in China has increased rapidly from 17.9 percent in 1978 to 39.1 percent in 2002, accompanied by rural-to-urban migration on a massive scale. More than 70 million rural migrants were working and living in urban areas at the end of 2000.

This influx of population has created a unique urban form—villages within cities, also referred to as “urbanizing villages” or ChengZhongCun in Chinese. For example, in the city of Shenzhen, with an official population of around 9 million in 2000, approximately 2.15 million inhabitants lived in 241 urbanizing villages with a land area of almost 44 square kilometers. In the city of Guangzhou, with a population of more than 8 million, there were 277 urbanizing villages with approximately one million inhabitants in 2000.