Monday, August 29, 2011

Ranking "Property Rights"

In a previous post I mentioned the advocacy of economist Hernando de Soto for titling programs in the informal settlements (i.e. slums) of Latin American countries.  De Soto claims that an informal arrangement of land ownership, which is to say an arrangement without the official sanction of a public body, impairs the extraction of capital from land and suppresses property values.  In the 2011 International Property Rights Index, published earlier this year, the Property Rights Alliance attempts to rank property rights protection in over 100 countries using de Soto's particular economic theories as the yardstick.

In addition to "registering property," another of the listed criteria for the ranking is "access to loans," which "is included in the IPRI because access to a bank loan without collateral serves as a proxy for the level of development of financial institutions in a country."  As recently as 2009, however, that year's Index gave a different explanation for the use of this variable: "because accessibility to a bank loan represents the opportunity for an individual to subsequently obtain property. Consequently, the easier it is to become a property owner, the stronger society’s support for a strong formalized property rights system and the investment in property."

At that point, someone may have informed the authors that the rate of homeownership in, say, Mexico, is over 80%, and that only 13% of Mexican homes are encumbered with mortgages.  India, too, has a homeownership rate of over 80%, and it is 79% in Tegucigalpa, Honduras.  Increasing access to loans actually appears to be correlated with a decrease in the rate of property ownership.  How do countries such as Mexico and India achieve this remarkable result? Through two primary means:
  • As the San Diego Union-Tribune notes: "Because Mexico's building regulations are less stringent than those in the United States, it's possible to build small, attached housing units on a massive scale to achieve large economies of scale."
  • Secondly, describing a situation in Honduras common to many Latin American countries: "[A] high rate of owner occupancy can be attributed to the fact that 46% of all residential properties in Tegucigalpa were obtained through illegal land invasion..."
Let's consider these two explanations.  In the first, because Mexico has far lesser restrictions on private property rights -- for instance, a lack of minimum lot sizes, street widths or square feet per unit -- it is possible to construct immense quantities of highly affordable, and decent, housing that people can purchase without even the need for a loan, and still the developers profit.  And yet, in the Index, Mexico is ranked 78th for its protection of property rights, far behind the United States at 18, which in spite of exceptional "access to bank loans" only pushed homeownership, for a fleeting moment, to 69 percent.

Favela street.
Property obtained through "invasion" of private or public land, on the other hand, is the least regulated of all.  Because the state does not formally recognize the occupants' claim to the land, zoning and land use laws are not enforced, and individual property "rights" (defined as an individual's right to use his land for his chosen purposes) are arguably at their fullest, subject only to the possibility of eviction by the state, yet, in the slums of Mexico, the odds that this will happen are  remote (see p. 14). Yet, bizarrely, it is in this freest of all property rights environments that de Soto perceives protection of property rights most lacking. 

Where vacant public or private land is valued highly for residential use, impoverished squatters essentially condemn the large land holdings of indifferent absentee landowners for the benefit of thousands -- the exact inverse of the typical process of urban renewal in the property-rights protecting United States, where in the late 60s and early 70s alone over two million mostly low-income people were evicted from their titled homes to the ultimate benefit of wealthy and influential interests, whether those of well-connected property developers or land-hungry private institutions.

The home-building squatters are in fact living out a Lockean version of property rights, a vision which appeals to natural rather than legal rights:
"Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature hath placed it in, it hath by this labour something annexed to it, that excludes the common right of other men: for this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good, left in common for others."  John Locke, Second Treatise of Civil Government.
Interestingly, the Index appears to contain some of the seeds of self-doubt.  A study of an informal settlement in Buenos Aires (p. 58tells a story that is at odds with the dire portrait often painted:


"In La Cava, only 16 percent of those polled said they have a property title for their houses. Some even asked what that was. Among the rest, 17 percent said they have an informal document, usually consisting of an informal sale/purchase invoice. Altogether, 84 percent said they do not have formal documentation. On average, they lived 15 years at the same house, which shows low turnover rates. Those who said they have a property title also have lived at the same house 15 years on average. [Note: longer than the U.S. average of 12 years].
....
There are not many problems in the sale/purchase of housing because deals are made with people they trust and payment is in cash at the moment of possession (90 percent of respondents).  Only 27 percent said there could be installments but much trust or familiar ties were needed.
We asked La Cava dwellers how they solve problems with neighbors when there is conflict related to continued coexistence, such as negative externalities.
....
Confirming conclusions from a subjective cost interpretation of the Coase Theorem, 76 percent said they solve these problems by talking with the other side. They prefer not having intermediaries, either from the same neighborhood or outside, and they avoid violence at all cost."
This case study calls into question two of de Soto's major assumptions: that informal owners face insecurity of tenure, when they in fact have longer tenure than American homeowners; and that without titles, sales will be difficult to make, when they seem to be easier, quicker and cheaper to make, being bought and sold like any other good.  This informal model of development is not necessarily one to emulate, but one to learn from, and particularly a good way to sharpen thinking as to what exactly is meant when we're talking about "property rights," and what sort of criteria might be best used to rank countries along those lines, if looking beyond the ones used in the Index.

Sources and Additional Reading:
2011 International Property Rights Index
Mexico's House Rules
Homeownership Rates: A Global Perspective

Urban Land Tenure Options: Titles or Rights?
Regularization of Informal Settlements in Latin America
Secure Tenure in Latin America and the Caribbean
The Role of Urban Slum Titling in Slum Improvement

11 comments:

  1. So in Mexico it's easier for people to build what they can afford and what they need, where they want it. And as a result, more people own houses.

    How can people exist without experts to tell them how to live?

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  2. More proof that the end result of regulations, zoning and formal land title is to maintain class divisions. These are the modern day equivalent of the enclosure of the commons.

    For more on that, see here: http://tinyurl.com/3k86rq9

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  3. De Soto's key idea about capital and credit is that people who own their homes can afford to invest. They have collateral they can use to get student loans for their kids or enough cash to get a small business going. But you need to have a system of titles and foreclosures. The bank will not loan to you if it is impossible to really make you pay. Ultimately it needs to be able to seize your property and sell it if necessary.

    Mexican towns and cities have rules about zoning, building size and form, materials and styles, historic districts, safety codes, historic landmark sites, and land use. I have seen literally hundreds of building projects stopped and closed in the midst of work for various violations. It's done the same way in small towns and big cities. The authorities come out with a big roll of 20cm wide paper sticky tape and wrap the ground floor entrances and walls in the tape. The tape is pre-printed announcing the closure, the general code book violated, and the prohibition on continuing work.

    Informal development in Mexico is rare today, though it continued on a large scale into the 1980s. Most large land holdings were nationalized in the 1930s as a part of a fantastically successful land reform plan based on Emiliano Zapata's Plan De Ayala. The collective ejidos produced by reform use a variety of cooperative methods internally to assign rights to citizens but are constrained by strong individual rights protections. Ejido property does not get taken informally -- at least not easily -- because ejidos are centers of organized political power.

    Most truly informal development followed the model of Ciudad Nezahualcóyotl which was built on unstable soils subject to flooding by Lake Texcoco but had to be legalized once a million people lived there. Today nearly all homes in Ciudad Nezahualcóyotl have electricity, running water, sewerage, telephone service, cable television, and trash collection. Flood control is done by multi-billion dollar projects trying to reduce the danger and damage from annual monsoons. Even in Mexico, the voters get taken care of eventually.

    There are a lot of narrow streets in Mexico and single family homes on small lots without setbacks and hundreds of towns with more quality urbanism each inside their borders than exists in the entire USA. That has nothing to do with informality. The rules that exist are written to support traditional urbanism. No minimum parking requirements, no setback requirements, no national street guidelines requiring overbuilt highways for every neighborhood lane, and no strict division of commercial and residential uses leaves lots of room to build a quality city.

    There is corruption and informality in Mexico but it is not a determinant of the urban form. Mexico simply has people and leaders who did not choose to destroy their nation so they could get free parking.

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  4. Brian, thanks for the great comment -- you live in Mexico I take it? Fascinating background. I did not mean to imply that there is a large amount of completely informal building going on right now in Mexico (I've slightly reworded the post to reflect that), but rather in countries like India and Mexico high ownership rates are achieved either through informal development processes or by density/traditionalist-friendly regulations. India by contrast has a large amount of ongoing informal development, yet I've read it currently is imposing minimum parking requirements in some urban areas.

    My point was mainly that, when ranking countries by their protection of "property rights," can't one make a case that Mexico's planning regulations as you describe them confer greater "property rights" on landowners than those in almost any American city. Narrow streets, no Euclidean zoning, no setbacks, etc., while enabling a traditionalist urban form, ultimately allow a landowner to do more of what he wants with more of his property.

    As for de Soto's argument: I'm skeptical about the idea of promoting homes as collateral, by way of titling programs, for a number of reasons which are mentioned in the literature I've cited, but that's a bit beyond the scope of this post.

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  5. There are two glaring problems with this article. First is this assumption "and still the developers profit". Why would you assume a developer is profiting? Might not many of these dwellings be shacks built from scrap by the homeowner?

    Second you assume rather naively that homeownership is a good thing. Would you rather live in Mexico or India with 80% + ownership rates or America with it's sub 70% rate? In fact states in America with higher ownership rates tend to be worse of than their renter neighbors.

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  6. Charlie is not making a case for increasing home ownership rates; nor is he advocating anyone live in the slums of Mexico or India. Instead, he is pointing out some problems with the way "property rights" are defined by the Property Rights Alliance and shows how we can learn from the more informal system of property rights that exist in flavelas.

    I'd suggest you work on your critical reading skills. The last paragraph of his article really says it all.

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  7. Vince, you mean to tell me that calling Mexico's policies "remarkable" isn't praising high ownership? Or having an urbanism blog that focuses almost solely on single family housing? Additionally, I never claimed that he advocated for living in slums. It seems it is you that needs to work on your critical reading skills, but based on your petulant reply I can safely say that you have far more problems than that.

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  8. Benny -- thanks for taking the time to read and comment. The point I made about the developer profiting was directed to the mass-produced attached housing currently being built by Mexican builders out on the fringes of Tijuana, Mexico City, etc. Seeing the amount that's being built, I made the assumption, not unreasonable I thought, that these developments make money for their builders in spite of the low cost per unit.

    The reference to Mexican levels of homeownership being "remarkable" was not really meant to praise the result, but to note the contrast between the American and Mexican results in the context of the Property Rights Alliance's position (which is very much pro-ownership). A pro-"property rights" organization which 1) believes that making homeownership easier (i.e. more affordable) is a virtue and 2) believes that access to loans are a key to achieving that result, while ignoring the lack of land use restrictions that have led to far more affordable homes in countries that are much poorer than the United States, invites this sort of critique. It does not imply, though, that I believe that high levels of ownership are per se desirable.

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  9. Do the younger populations of developing countries facilitate a more liberal approach to building development?

    Are rich countries with their ageing populations hobbled by the "my house is my pension" syndrome, which puts huge amounts of pressure on elected politicians to keep house prices high?

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  10. Great article although cannot agree with all it. the above comments are very good to read.

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