Real Estate Market in Developing Countries: Slums and Housing Supply

Abstract

We study real estate markets where squatting is tolerated by authorities and a dual (formal and informal) housing market emerge. We develop a housing supply model in which geographical constraints and squatting play distinct roles on the housing supply curve. We estimate supply curves for more than 90 metropolitan areas using satellite data that maps steep-sloped terrain and bodies of water, a comprehensive slum survey, and census data of more than 600 municipalities. We find that illegal settlements are more important to explain the cross-sectional variation in supply elasticities than geographical constraints. As an illustrative application, estimated supply elasticities are used to forecast future housing prices increase due to natural population growth.