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. 58) tells 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