Embed Size (px)
Citation preview
1
The value of formal titles to ownership in residential
property transactions: Evidence from Kinondoni
municipality Tanzania
Abstract
Under property informality, perceptions on transaction failure risks at purchase can diversify the spectrum of
possible prices depending on anticipated occupation strategies subsequent to purchase. Based on survey data on
1514 residential property owners from Kinondoni municipality, Dar es Salaam Tanzania, binomial logistic
regression models were implemented to predict pre-purchase perceived transaction failure risks and mixed effect
models were utilised to examine the effect of the predicted risks on (2010 constant) price of three-bedrooms finished
and unfinished housing units and 400m2 plots. The results suggest that risk averse households pay on average
around Tanzanian Shillings (Tshs) 349,000/=more to acquire formally titled residential properties than they would
pay for similar but informal properties simply because of a lower perceived transaction failure risk for the former.
Such lower perceived risk is however, unambiguously relevant only among “unfinished housing” purchasers. For
“vacant plots” and “finished housing” units, a positive net risk-price premium is dependent on the anticipated
occupation strategy subsequent to purchase. On average “frequent visitation” after purchase induces a higher risk-
price premium over formal purchases for both “vacant plots” and “finished housing” units. A Legal title to a
“vacant plots” has a small risk-price premium of around Tshs. 5,000/= over “effective occupation” for the same
but a relatively higher risk-price discount for “frequently visited” plots among risk lovers yielding a positive net
risk-price premium of around Tshs. 16,000/=. These marginal risk-price premiums for “vacant plots” suggest that
informal and formally titled plots sale on average around the same price regardless of whether the purchaser is risk
averse or otherwise. Formally titled “finished housing” is on average, purchased at a higher price but such
premiums are limitedly associated with risk aversion suggesting that such premiums emanate from factors other
than the use of formal titles in transactions.
Key words: housing transaction, transaction risk, developing countries, price premiums
Introduction
Residential property markets of the global south are typically characterised by a high degree of
informality which can change the spatial pattern of prices against theoretical prescriptions. With
increased informality in any city, the effect of spatial proximity to the CBD on property
price/rent does not only depend on the bid-rent function [distance] but also perceived ownership
risks (Durand-Lasserve, Durand-Lasserve, & Selod, 2013). In Tanzania, residential property
transactions can be executed in both formal and informal markets as a way of acquiring
occupancy rights (Kironde J. , 2000). The functioning of the formal property market is however,
severely constrained by lack of accessible and timely transaction information which is partly
linked to complexities and malfunctioning of the Land Administration Organisations (LAOs)
(Kombe, 1994). Sale of vacant land is strictly regulated to prevent land speculation, though the
effectiveness of such controls is questionable. Vacant formal land has been transacted
maliciously through pretendance of disposition for “for love and affection” or developing a
simple structure before selling or selling of “dilapidated” properties which are subsequently
2
redeveloped and in certain cases unscrupulous land administration officials have been successful
in selling revoked plots (Mosha, 2012). At transaction, information of these violations may
hardly be available making a bonafide purchaser at risk even when the subject property is
attached to a legal title.
In terms of prices, studies of formal and informal markets in Tanzania have pointed out that
prices paid for residential properties are limitedly linked to utility maximisation hypothesis since
occupiers sell to meet immediate need (transaction need) including household expenditure on
education, health and even food and alternative shelter (Young & Flacke, 2010; Kironde J. ,
2000). Additional observations however, point to the possibility of a higher price for formal than
informal residential properties (Collin, Sandefur, & Zeitlin, 2015). There are however, limited
evidence that such lower prices in informal housing is in any way associated with perceptions of
the buyers about informality at the time of purchase. Similarly, some studies points to proximity
consideration in purchase of plots and housing which may be motivated by social consideration
(Limbumba, 2010) or economic opportunities (Eliwaha, 2011; Alananga, 2015). There is
however no any study to date that has attempted to explain residential property demand in terms
of perceived transaction failure risks due to questionable title or sellers qualities.
In this study it is incontestable that informal residential properties are priced lower than their
formal counterparts but it is unclear as to whether such lower prices are in any way associated
with more perceived post-transfer transaction failure risk at purchase. That is there is little
evidence that occupiers of informal housing in Tanzania and developing countries in general
perceive relatively more transaction failure risks as a result of informality when compared to
their formal counterparts. This is supported by the confidence that people have in informal
housing as noted through a good mix of residents and housing quality observable in many of the
so called informal settlements (Sivam, 2002; Kironde L. , 2006; Mushumbusi, 2012; Sheuya,
2010; Ali & Sulaiman, 2006). This study therefore, analyses the perceived transaction failure
risks in relation to purchase price (in real value) for both formal and informal residential
properties (defined to include finished and unfinished houses and plots) in order to establish the
associated risk-reduction price premiums of different residential property types being transacted.
The main hypothesis is that formal residential properties fetch significant risk reduction price
premiums over informal ones at purchase.
Modelling informality and transaction failure risk
We consider here the case of relocating closer to the newly acquired rights as an informal
mechanism to moderate perceived transaction failure risk. Buyers who purchase residential
properties (land unfinished or finished houses) closer to where they live are said to “effectively
occupy” their newly acquired properties. These effective occupiers are presumed to experience
the lowest transaction failure risk A at property SH purchase and pay fP for the newly
acquired formal or informal properties. A part from residency, they also consume the composite
good Sg and have income Y . As a result they face a budget constraint SfS gPHY . A
household buying a distantly held property, can relocate such that its utility is equivalent to
purchasing within residency proximity or can stay within current locality in which case it is said
3
to “ineffectively occupy” the purchased property. If it relocates it pays price iP for the newly
acquired property RH , transport cost T and expenditure on a composite good Rg . Its
budget constraint will be TgPHY RiR . If the household decides to ineffectively occupy
the newly acquired property, it faces the budget, SiRfS gPHPHY . If all households take
the probability of losing the newly acquired rights A as given, then each chooses the ex post
consumption bundle by maximizing the expected utility as:
SS
S
ARR
R
A HguHguUE ,1),( ................................................................ [1]
Substituting the budget constraints for effective occupation irR PTgYH and ineffective
occupation fiRSS PPHgYH into the expected utility function we have;
iRR
R
AfiRSS
S
A PTgYguPPHgYguUE ,1, …............................. [2]
Suppressing the subscripts on A and maximising the expected utility function yields the first
order condition as;
fS
g
S
H
S
H
S
gf
R
S
S
S
f
R
Pu
u
uuPH
u
g
uP
H
UE
0
and
R
g
S
g
R
Hi
R
H
R
g
S
gi
S
R
S
R
S
S
i
S
uu
uP
uuuPH
u
g
u
g
uP
H
UE
1
011
...... [3]
In the first condition, the marginal rate of substitution between housing and the composite goods
must equal its price as it is the case in symmetric markets. The second condition is that the ratio
of expected utility from “effective occupation” and the sum of the utility of consuming the
composite good with “ineffective occupation” and lost/gained utility from consuming the
composite good with “effective occupation” should equal the price at new location iP . The
two condition suggest that prices for ineffectively occupied informal properties iP are likely to
be lower than effectively occupied ones fP since S
H
R
H uu . Logically, “staying” after
purchasing a distant residential property reduces the purchaser‟s utility by increasing the
probability of losing the newly acquired informal property. The first order condition can be
solved for the optimal quantity of housing for ineffective and effective occupation as shown in
equation 4:
4
Figure 1: Residential property preferences in effectively and ineffectively occupied housing based on
formal-informal dichotomies postulated in Jimenez, (1984)
,,,,**
ifRR PPTYhH and
,,,,**
ifSS PPTYhH .................................................................................... [4]
The indirect utility function can be obtained by substituting demand equations back into the
original expected utility, RVUE as:
jikP
n
oj
n
j VV 1
(C)
(A) (B)
fP if PP ,
A
B
nikP
S
ojV
S
oj
S
j VV 1
kj
kn
S
onV
jikP ikjP nikP
S
onV
A
B
S
jV0
oj
S
j VV 1
kj
if PP ,
kn
fP
nikP jikP
nikP
A
B
kj
if PP ,
kn
fP nikP
jikP
jikP
S
onV
nikP
n
ojV
5
SRR vvV 1
),,,,(),,,,,(),,,,(u
,,,,
***
ifRifRiifRf
if
RR
PPTYHPPTYHPPPTYHPTY
PPTYvv
),,,,(),,,,,(u
,,,,
**
ifSifRf
if
SS
PPTYHPPTYHPY
PPTYvv
................................................. [5]
The )(v ‟s are the indirect utility functions where SR vv after distant property purchase. The
price that a buyer would be willing to pay for a distant property to achieve utility RV can be
obtained from 4 as:
R
fii VPTYpP ,,,, ..................................................................................... [6]
Where, Y , T and the distribution of are determined outside the model.
With a uniform distribution of across settlements, the equilibrium iP and fP clears the market
and a household decision involves only comparing expected utility from staying SV and from
relocating RV . With SR VV , households are better off “ineffectively occupying” their newly
acquired distant properties something that increases the demand and price of “effective
occupation” fP until the difference between iP and fP induces a sufficient disutility on current
occupation (price-induced disutility) to offset the extra utility due to “ineffective occupation”.
Relocating closer to newly acquired property is attractive if the potential price-induced disutility
of staying (higher price) outweighs the risk-induced disutility (expected transaction failure risk)
of the same. Contrariwise, staying is attractive if the potential price-induced disutility is lower
than the expected risk-induced disutility.
Therefore, at equilibrium prices should be such that the expected utility from “effective
occupation” RV is just the same as that from “ineffective occupation” SV . Thus we have;
),,,,()1(),,,,(),( ** if
S
if
R
SR PPTYVPPTYVVVPYV ..................... [7]
Where *V denotes equilibrium utility values. The equilibrium price gap if PP is the amount
necessary to make a household indifferent between “effective occupation” and “ineffective
occupation” (i.e. staying within its current settlements with a chance of losing whatever it has
accumulated in distant settlements). In practice the probability of losing distant occupancy rights
after purchase may vary across settlements within the same city and it is possible that even
“ineffective occupation” may have relatively lower perceived transaction failure risk leading to
if PP . For risk averse households, “effective occupation” (relocation) following a distant
purchase is more likely than ineffective occupation unless iP is sufficiently low.
6
Assuming a fixed transaction failure risk for each occupation alternative, observed residential
property prices are equivalent to households‟ willingness to bid at each . The locus of
combinations of perceived transaction failure risk and price that would make the property
purchaser indifferent between effective and ineffective occupation are shown Figure 1 as S
kV
under the assumption that RV and
SV are monotone and continuous in and fP . Panel (A)
suggest that if the risk-reduction effect of higher prices is increasing at an increasing rate, the fall
in utility resulting from higher price can fully be compensated for by a subsequent reduction in
transaction failure risk. Buyer‟s willingness to bid higher for “effective occupation” rather than
“ineffectively occupation” increases. Panel (B) indicate that if the risk-reduction effect of higher
prices is increasing at a constant rate, the fall in utility resulting from higher price has a constant
risk reduction effect. Buyer‟s willingness to bid for “effective occupation” rather than
“ineffective occupation” remains unchanged across risk levels. Panel (C) indicate that if the
risk-reduction effect of higher prices is increasing at a decreasing rate, a small fall in utility
resulting from higher price would require a larger reduction in transaction failure risk. That is
buyer‟s willingness to bid for “effective occupation” rather than “ineffectively occupation”
diminishes as risk increases.
The preceding analyses suggest that demand for residential properties in legal pluralistic markets
can be determined by price-risk preferences among market participants. The higher the price the
higher is the disutility from “ineffective occupation” and the more likely that households will
demand reduced through “effective occupation” leading to the downward sloping informal
housing preferences. Thus the transaction failure risk must be low for any household to pay a
higher price for an ineffectively occupied informal property (Tinsley, 1993). In other words,
people buy highly risky properties only when they are somehow compensated through lower
price otherwise they will strongly demand “effective occupation” through proximity to moderate
perceived transaction failure risk. “Ineffective occupation” may however, be motivated by a
guaranteed title to ownership. In formalised settlements, transaction failure risk tend to be lower
but most land purchases goes into the hand of a few powerful and well connected individuals and
speculation tend to dominates (Fekade, 2000; Rath & and Routray, 1997; Yonder, 1987; Payne,
1996). As long as the more connected are a certain class (i.e. rich), speculated land tend to be
priced at a higher price than when speculated by the poor (Boucher, 2005). As a result of these
higher prices, those with less economic muscles tend to be pushed further to the urban fringe
where they expect to “ineffectively occupy” informal land at a cheaper price (Vincent, 2009).
The utility from “ineffective occupation” SV may be determined by the utility of effective
occupation RV and the redistributed consequences arising from diversities in population,
growth rate and construction cost across settlements within the same city (Tinsley, 1993; Hansen
& Skak, 2008); variation in housing types (Takeuchi, Cropper, & Bento, 2006); relative
proximity to physical and social networks, workplaces and the CBD (Rath & and Routray,
1997); neighbourhood and housing services, poor sanitation and pressures on schools (Tinsley,
1993; Manaster, 1968; Penrose, de Castro, Werema, & Ryan, 2010; Rose, 2006; Field, 2003) and
lot size (Friedman, Jimenez, & Mayo, 1988). Other factors for utility differences may include
original land access modality (Durand-Lasserve, Durand-Lasserve, & Selod, 2013), gender of
household head since female household head often engender less transfer uncertainty (Lanjouw
& Levy, 1998), type of employment, household size, duration of residency and education level
7
(Friedman, Jimenez, & Mayo, 1988). According to Selod & Tobin, (2013) the social
connectedness (proximity to LAO) make social distance an important determinant of the costs
that household pay to mitigate transaction failure risk. Well connected individuals are more
likely to enjoy lower transaction failure risk at a lower cost than less connected individuals
(Navarro I. A., 2008). The multiplicities of housing utility determinants suggest that title alone
may not be an important signal of expected prices in legal pluralistic markets (Navarro &
Turnbull, 2010). Other factor must be considered in the modelling process.
Behavioural factors could be responsible for the concave shape of risk-price preferences as
provided in Jimenez, (1984). The price differentials between fP and iP will increase with
when utility is held constant. With a given , prices in predominantly “effectively occupied”
settlements may differ from “ineffectively occupied” ones such that if PP and “ineffective
occupation” price will have a higher utility whenever it is below fP . That is when transaction
failure risk is high, informal properties are purchased only if either their respective prices are
below formal ones or “effective occupation” is feasible. If D represent a set of household
characteristics such as tastes and household composition. The utility function for the jth
“ineffective occupier” can be written as;
jkikfjj
R
kjkikfjj
S
k
S
j DPPTYVDPPTYVV ,,,,,)1(,,,,, .............. [8]
Where k represents transaction failure risk in locality k and ikP is the price of “ineffectively
occupied” property at location k . Assume residential units are sold to the highest bidder and the
number of highest bids must equal the number of household types in each anticipated occupation
strategy, then the highest bid is determined by the level of utility for that occupation strategy
adopted by that household type. Let kj index the alternative purchase locality chosen by
occupier j . Then at equilibrium we have;
jkjikjjj
R
kjjkjikjfjj
S
kj
S
ojoj DPPTYVDPPTYVVV ,,,,,)1(,,,,, .............. [9]
The equilibrium is obtained by comparing all indifference curves at a particular location to
obtain the highest bidder. This can be shown diagrammatically for a two individual case as in
Figure 2. In all panels of Figure 2, it is evident that household j outbid household n only above
but not below. Thus the equilibrium set of bid rent would be the outer envelope of the utility
maximizing household‟s indifference curves as shown in panel (A) of Figure 2. It is also
possible that certain localities may exhibit a certain degree of price-risk complementarities since
the outer envelope of the two perfect substitutes may have a kink as shown in panel (B) of Figure
2. In this model “ineffective occupiers” are difficult to predetermine but if high income
households are type n households, they will outbid poorer household type j whenever
transaction failure risk is lowest. i.e. the slope of the high income households utility locus is less
than that of the poor in absolute terms since 0 iP by definition. Thus, the rich would
require a larger reduction in transaction failure risk than the poor for the same increment in
housing expenditure.
8
Figure 2: Equilibrium set of bid rent given the risk-price preferences for two individuals
However, the same is true if the poor were type n households. As proved in Jimenez, (1984),
the rich may be more likely to purchase and relocate than the poor only if their relative-risk
aversion measure (Arrow Pratt relative risk aversion measure) in relation to income elasticity of
demand is higher (Jehle & Reny, 2011). In residential property submarkets where housing
demand is relatively income inelastic, the decline in prices that would be required to compensate
for higher risk of “ineffective occupation” will be larger for high income households than low
income one. If differences in housing consumption between the rich and the poor is less than
proportional to income differences, a decline in prices in “ineffectively occupied” properties
would benefit the poor if it were to decline by the same amount following a slight increase in . To keep utility unaffected, prices must fall more to induce relatively richer households to
participate in relatively risky markets.
C
A
fP
E
D
C D
E
D
A
C
S
onV
(B)
(A)
(C)
if PP ,
S
ojV
S
onV
S
onV
A
S
jV0
if PP ,
fP
if PP ,
fP
n
ojV
E
9
The effects of relocation cost (T) on households‟ risk-price preferences are to make them less
steep as T increases. That is higher relocation cost makes a buyer household increasingly willing
to pay higher for risk reduction initiatives than when relocation cost are lower. If relocation cost
is some function of distance ( d ) then the far a settlement is the higher is the likelihood for
relocation as a strategy to moderate the perceived transaction failure risk. It is also possible for
transaction failure risk to be moderated by time and social distances. It should be noted however
that “effective occupation” is only one among the many strategies that buyers of informal
residential properties may use to moderate transaction failure risks. Others include, initial
construction, frequent visitations, the use of private guards, material delivery without
construction and economic use of property other than occupation. All these strategies can be
analysed along similar lines to the postulates of this paper.
Research methodology
The data used in this study were collected in Kinondoni municipality. Kinondoni Municipality is
one of the three municipalities of the city of D‟Salaam others being Temeke and Ilala.
According to the 2012 population and housing census, the municipality has a population of
446,504 households (National Bureau of Statistics -Tanzania, 2013). Kinondoni municipality
embraces two official systems of land tenure, the first is a temporary Residential License (RL)
and the other is a granted Certificate of Right of Occupancy (CRO). The residential license lacks
many of the features of a title such as perpetual security, collateralisability and transferability
(Collin, 2013), but is the most advocated means for formalising urban properties under The
Property and Business Formalisation Programme locally abbreviated as MKURABITA.
Furthermore, a CRO does not “protect” property owners from Government taking but facilitate
compensation and is effective in mitigating expropriation risk compared to RLs (MKURABITA,
2008). The vast majority of the municipality‟s land owners however, have neither of the two.
Table 1: Definition of variables
S/N Variable Name Abbrev.
Dependent variables
Title induced transaction failure risk; whether the occupier doubted the
title declared by the seller at purchase (“High” if the occupier doubted;
“Low” if otherwise)
R1
Seller’s induced transaction failure risk (“High” if occupier the seller
at the time of purchase; “Low” if otherwise)
R2
Price; is the 2010 adjusted purchase prices for residential properties in
Tshs
Pprice
Independent variables
A Demographic variables
A:1 Household head gender (either “Male” or “Female”) HhGender
A:2 Age of household head at purchase in years Age
A:3 Household income at purchase in natural log in Tshs Hhincome
B Property related variables
B:1 Property type acquired (“vacant” if vacant plot; “Unfinished” if
unfinished house; “Finished” if finished house)
Ptypeq
B:2 Neighbours at habitation “Less than 2” if less than two; “Btn 2–5” if
between 2 and 5; “Btn 5-10” if between 5 and 10; “10 and above” if 10 or
more
Neighatp2
B:3 Occupation strategies after purchase (“EO” if relocated to protect new
property; “LG” if relied title documents to protect rights; “VIS” if
Occtypeq
10
S/N Variable Name Abbrev.
relied on frequent visitation of purchased property)
C Ward level control variables
C:1 Purchaser’s mobility after purchase (“Relocated” if moved towards the
newly acquired property; “Stayed” if otherwise) Mobafterp
C:2 Purchase ward categories (“PW_Within” if purchased within residency ward;
“PW_Outside” if otherwise) Puchwcat
Mobility after purchase (“Stayed” if did not move; Relocated if
otherwise) Mobafterp
D Distance and time variables
D:1 Distance to CBD in Km DistCBD
D:2 Duration of stay in current location in years Dur
D:3 Occupation delays in years ARY
D:4 Year of Acquisition (actual) YPA
D:5 Year of Acquisition category (intervals of 5 since 1965) YPAC
D:6 Locality of purchase (“PW_Within” if purchased within residency ward;
“PW_Outside” if otherwise)
Puchwcat
E Title induced transaction failure risk specific predictors (Adverse selection)
E:1 Legality at purchase (“LG_Access” if legal; “IF_Access” if informal;
“OR_Access” if other mode of access
Accessmode
E:2 Perceived capacity to transfer rights (“Incapable” if cannot; :”capable”
otherwise)
Captrans
E:3 Title verification before purchase (“Verifiable” if verified through
documented title; NotVerifiable” if otherwise)
Verifp2
F Mistrust risk specific predictors
F:1 Social connectivity (“Connected” if has known relationship at local of
community level; (“NotConnected” if otherwise)
Socconnect
F:2 Perceived ability to collateralise property (“NotAssignable” if unable;
“Assignable” if otherwise)
Assignofrights
F:3 Perceived credibility of owners at transaction (“NotCredible” if
doubtful; “Credible” otherwise)
Ownercre
G Credibility induced transaction failure risk specific predictors (Moral hazard)
G:1 Perceived likelihood of unlawful taking (“Expropriatable” if likely;
“NotExpropriatable” if otherwise
Exproofrights
G:2 Perceived recoverability of rights (“Recoverable” if assignor retaking is
possible”; NotRecoverable” if otherwise)
Recovofrights
G:3 Enforement of rights after purchase (“VIS” if frequent visits; “EO” if
effective occupation; “LG” if government guarantee)
Enforcp2
Data and variables
To obtain the data for use in this study, an extensive survey based on a structured questionnaire
was carried out between January and June 2014 in 27 out of the 34 wards of Kinondoni
municipality reaching a total of 4345 house owners. The questionnaires were self administered
by the researcher using 10 independent surveyors. The response was 2340 filled questionnaires
though only 1514 questionnaires were finally found to be fit for the purpose of this paper. The
questionnaire covered the variables shown in Table 1. The sampling strategy implemented can
be described as “subward clustered incidental sampling” strategy. This is because even if
properties were selected systematically along major roads and along pathways, inclusion of
individual respondents depended on availability and willingness to participate. The unit of data
collection was a household as defined by the National Bureau of Statistics (National Bureau of
statistics (Tanzania), 2009). The data on prices and perceived risks were aggregated
hierarchically as shown in Figure 4. At the lowest level, price depends on the intended
occupation strategy which defines the expected ownership risks subsequent to occupation. For
the buyer, the demand for “effective occupation” after purchase may be reflected in perceived
recoverability of rights, illegal expropriatability, assignability and the general perception about
seller‟s (including agents) credibility. These additional variables were utilised in analysing both
risks based on the definition provided in Table 1.
11
Figure 3: Hierarchical nature of price data given the perceived risks at purchase and different property
types (NB. PT1, Vacant plots, PT2 = Unfinished houses and PT3 = Finished houses)
Data analysis
Logistic regressions models were used to predict the perceived transaction failure risks. The
models‟ functional form included linear and polynomials partial correlations as well as
interraction of some variables. To predict the respective risks the following model was
implemented:
DQDRLog HDH *1
0
........................................................................... [10]
Where is the probability of perceiving title or credibility induced transaction failure risk as the
case may be, R are the risk specific determinants and D are the other control variables
identified in the literature including the demographic attributes of the household head. Solving
for the probability , equation 1 can be expressed as;
DQDQ
DQDQ
HDH
HDH
e
e*
*
0
0
1
............................................................................. [11]
Thus, in presenting the data both the odds
1 and the probabilities are used and all
interpretations are based on the 95% confidence limit although confidence limits up to 90% are
provided in the output tables. Predictions from the two models were then combined in a linear
mixed effect model with property types (Ptypeq) nested in risk type (Risktypeq) yielding six
Unfinished
House Plot
Title induced
risks
Sellers’
credibility risks
High Low
EO, VIS, LG
House
High Low
House Unfinished
House Plot House
Unfinished
House Plot House
Unfinished
House Plot
EO, VIS, LG EO, VIS, LG EO, VIS, LG EO, VIS, LG EO, VIS, LG EO, VIS, LG EO, VIS, LG EO, VIS, LG EO, VIS, LG EO, VIS, LG EO, VIS, LG
12
groups (2*3) as shown in Figure 3. The Occupation strategies are estimated as interaction in
purchase price i.e. OcctypeqPpriceLnP *)( . Given the hierarchical nature of the data, a
conditional three level hierarchical model was employed. The model can be represented as in
equations 12 - 14:
Level 1:
6 ..., 2, 1,k ;210 ijkjkjkjkijk YPRisk .................................................... [12]
Level 2:
jkjkkjk
jkjkkjk
jkjkkjk
PT
PT
PT
221202
111101
001000
......................................................................................... [13]
Level 3
kk
kk
kk
v
v
v
221021
111011
001001
........................................................................................................... [14]
With
,0
0,0
,0~
2
10
2
00
1
0
N
jk
jk ,
0
0,0
,0~
2
10
2
00
1
0
N
v
v
jk
jk and 2,0~ Nijk
Where; ijkRisk is purchaser i ‟s predicted log odds of perceiving type j risk when buying
property type k ; jk1 is the price fixed effect which is different for the three occupation
strategies, while jk2 is the acquisition year (YPAC) fixed effect; jkPT are the
Ptypeq*Risktypeq random effects with ijk being the random effect comprising within ikv and
between group variance 10i ; ijk is the random error term which is assumed random normal.
All the random within group effects are assumed to be normally distributed around their
respective zero mean and constant variances. The analysis further assume a polynomial
relationship between risk (log odds) and the natural log of price given the possibility for higher
risk when prices are very low and opportunism at very higher price. These polynomial
relationships make fulfilment of the LME assumptions on correlation among random effect and
the error terms highly contentious. Since the focus of this analysis is on the predicted
behavioural pattern, inter-variable correlation has been ignored though it was tested and found to
be within acceptable bounds at 2nd
orders polynomial.
13
Empirical findings
Based on the above models, the collected data were analysed and the analysis results are
presented in the following subsections.
Table 2 Descriptive statistics
Variable name Min. Max. Mean
Std.
Dev.
Dependent variables
R3 0 1 0.46 0.50
R4 0 1 0.12 0.32
Pprice (log) 5.32 20.04 13.94 1.96
Finished 7.62 20.04 16.00 1.91
Unfinished 10.27 18.74 15.40 1.77
Vacant 5.32 17.72 13.54 1.75
Independent variables
A Demographic control variables
A:1 Gender of household head 0 1 0.84 0.37
A:3 Age at purchase -28 66 27 13.93
A:4 Income at purchase(10,000th) 0.02 1355.20 58.30 109.83
B Property related variables
B:1 Property type
Property type vacant 0 1 0.81 0.39
Property type unfinished 0 1 0.06 0.24
Property type finished 0 1 0.11 0.31
B:2 Number of neighbours 0 40 5 3.99
B:3 House type (Traditional) 0 1 0.44 0.50
C Ward level variables
C:1 Purchase ward category 0 1 0.69 0.46
C:2 Mobility after purchase 0 1 0.84 0.37
C:5 Ward age 19.00 85.00 54.02 18.32
D Distance/Time control variables
D:1 Distance to CBD 3.17 30.94 13.10 7.40
D:2 Duration of stay 1 86 19.25 13.84
D:3 Occupation delays in years -45 50 4 7
D:4 Year of acquisition category 1955 2015 1994 14
D:5 Purchase year categories
Pre reform era 0 1 0.28 0.449
Liberalisation era 0 1 0.36 0.480
Land reform era 0 1 0.35 0.477
E Title induced transaction failure risk specific predictors (Adverse selection)
E:1 Legality
Legal access 0 1 0.17 0.37
Informal access 0 1 0.58 0.49
Other access 0 1 0.25 0.43
E:2 Capacity
Occupier is capable to transfer 0 1 0.30 0.46
E:3 Verifiability
Verification Government
supported 0 1 0.35 0.477
Verification Community
supported 0 1 0.56 0.496
Verification Not Supported 0 1 0.09 0.284
F Mistrust risk specific predictors
F:1 Occupier is socially connected 0 1 0.43 0.50
F:2 Occupier holds assignable
rights
0 1 0.95 0.21
F:3 Other occupiers can credibly
transact
0 1 0.20 0.40
G Credibility induced transaction failure risk specific predictors (Moral hazard)
G:1 Occupier holds expropriatable
rights
0 1 0.35 0.48
G:2 Occupier holds recoverable 0 1 0.44 0.50
14
Variable name Min. Max. Mean
Std.
Dev.
rights
G:3 Enforceability
Enforcement Effective
occupation
0 1 0.62 0.49
Enforcement Frequent visitation 0 1 0.30 0.46
Enforcement Title 0 1 0.08 0.28
Number of observations 1514
Descriptive statistics
Descriptive statistics for the variables used in the analysis are provided in Table 3. Around 81%
of the respondents purchased vacant plots while 6% purchased unfinished houses and 11%
purchased finished houses. Although the maximum price is as high as Tshs. 500 million (Exp.
20.04), the average price is very low at around Tshs. 1 million per property. As expected plots
are sold at the lowest price while an unfinished house has the highest price but on average it is
finished houses that fetch the highest price. Title induced transaction failure risk was perceived
by 46% of all respondents while seller‟s credibility risk was perceived by only 12% of all
respondents. Thus, despite the low levels of formality in the municipality, the perceptions are in
favour of both lower transactions failure risks as well as purchase price. In terms of access
modality, it can be observed that 58% of occupiers had access to their properties through some
informal mechanism while only 17% legally occupied the property. Social connection is slightly
below 50% i.e. 43% while perceived illegal expropriation is perceived by 35% of all
respondents. Responses on enforceability provide some indication that “effective occupation” is
the most preferred way to protect newly acquired rights and is implemented by some 62% while
30% conducted “frequent visitation” (includes other mechanisms) and only 8% relied on formal
title. Information on the other variables is as shown in Table 3.
Model results for predictors of transaction failure risks and prices
The significant predictors of both transaction failure risks based on logistic regression and OLS
results for prices are summarised in Table 4. Three variables shown at the end of the table were
found to be significant predictors of both transaction failure risks and prices. The direction of
effect show more positive for prices and negatives for risk providing some indication of the
downward sloping price-risk preferences as theorised in the modelling section of this paper.
There are however, notable exceptions to that observation. Additional variable which increases
the likelihood of doubting a title at purchase include legality of access to vacant plots. The
purchase of vacant lots is also likely to increase the perceived transaction failure risk. Factors
that are likely to reduce title related doubts include purchases conducted before the year 2000;
proximity purchases and purchases done by male household head.
Table 3: The direction of effect of predictors of purchase price and perceived transaction failure
risks
Variables Pre-transfer risk Purchase
price Title Credibility
Significant predictors of Title risks
YPAC4Liberalisation_Age - YPAC4Pre-reform_Age - Verifp2Verifiable:PurchwWithin -
15
HhGender (Male, Female) -/_ Significant predictors of Sellers' credibility risk
Enforcp2Title - AssignofrightsNotAssignable - SocConnectNotConnected + CredibilityNotcredible + Enforcp2Title:SocconnectNotconnected - Enforcp2Title:PurchwWithin + RecovofrightsRecoverable:AssignofrightsNotassignable + ExproofrightsNotExpropriatable:AssignofrightsNotassignable + ExproofrightsNotExpropriatable:SocconnectNotconnected - RecovofrightsRecoverable:SocconnectNotconnected - RecovofrightsRecoverable:SelcredibilityNotcredible - ExproofrightsNotExpropriatable:SelcredibilityNotcredible + Significant predictors of price
Ward Age (Old, New) -/_ Ward level mobility (Stayed, Relocated) -/_ AccessmodeLG_Access:SocconnectNotConnected
-
PuchwcatPW_Within:AccessmodeLG_Access
+ PuchwcatPW_Within:AccessmodeOR_Access
+
Significant predictors of price and title risks
AccessLG + + Ptype type (vacant, Unfinished, Finished) +/_/_ -/-/_ Significant predictors of price and sellers' credibility risks
RecovofrightsRecoverable + - Neighboursp - + RecovofrightsRecoverable:PurchWithin + + PurchwWithin:Verifp2Verifiable + + poly (ARY, 3) [1/2/3] +/_/_ _/_/- Significant predictors of price and transaction failure risks
Poly(Age,3) [1/2/3] _/-/+ _/_/- +/-
poly(DistCBD, 3) [1/2/3] _/_/- _/_/+ _/+/- poly(Income, 3) [1/2/3] +/_/_ +/_/_ _/+/-
NB: poly = polynomial powers and are presented as [1/2/3] which is the first, second and third
order respectively
Factors that fuels doubts on seller‟s credibility at purchase include lack of social connection
among buyers, delayed occupation after purchase and lack of credibility among sellers. Rights
which are illegally not expropriatable may be perceived risky if the buyer can not re-assign rights
after purchase or the seller is perceived “not credible”. Within ward purchases may also be
riskier if the only mechanism to protect rights is documented title or when the seller can easily
recover disposed rights. The risks associated with recoverable rights are also compounded when
such rights are not assignable. There are also a number of factors which can reduce the
perceived transaction failure risks. Lack of social connection for stronger rights that are
perceived not illegally expropriatable has lower risks suggesting that when held rights are strong,
social connectivity has a limited role. Enforcement of rights through a documented title even
when one is not socially connected has lower perceived transaction failure risk. The non
assignable rights have lower transaction failure risk which is further compounded when such
rights are recoverable.
16
Figure 4: Purchase price and transaction failure risks in terms of significant variables
In terms of prices, apart from the joint predictors which are summarised in Figure 1, Older
settlement (ward) seem to have lower overall prices than new ones. Similarly purchasers who do
not relocate seem to also pay significantly lower prices compared to those who relocate. This
potentially suggests an extra cost for relocating purchasers which is implicit in the price they pay
other than the transport cost. The joint predictors of price and seller‟s credibility induced risks
suggest a negative relation except when properties are purchased within proximities and are also
recoverable or when they are verifiable. Within ward properties that are perceived recoverable
or are verifiable are associated with both higher risk and higher price at the margin. Similar
observation can be made for the two joint predictors of price and title induced transaction failure
risk. It seems residential properties that are riskier end up selling at lower price unless they have
documented title. For documented title properties, they tend to fetch a higher price increment
even when they are perceived riskier.
The relationship between price and perceived transaction failure risks
The prediction from the just described models were used as input in a linear mixed effect models
to generate the potential behaviour of price paid in response to pre-transfer transaction failure
risks. The results of the analysis are presented in Table 4. It can be observed that perceived
transaction failure risk is a significant predictor of purchase in the 3rd
and 4th
order polynomials
where it is increasing first then falls. Given the higher negative intercept, the model suggest that
prices will be an increasing function of risk with moderate downward and major upward swings.
The effect of purchasing a “titled property” over an “effectively occupied” one is negative
though insignificant but “frequent visitation” has a positive and significant marginal contribution
Property purchase
prices
Ward Age
Mobility after purchase
Pre-transfer title risks Pre-transfer Sellers’ risks
Seller‟s credibility
Expropriatability
Enforceability
Social connectivity
Purchase year
Gender of head
Age of the purchaser
Household income
Distance to CBD
Number of neighbours
Occupation delays
Recoverability of rights
Legality
Property type
17
to price. The year of purchase is positive and significantly correlated to price suggesting an
annual price increase of around 7% though the effect turns out to be insignificant for titled
property purchase. It is evident that price increase over time are more pronounced in informal
than formal residential properties.
Table 4: Results on the relationship between predicted property prices and perceived risks
2nd order polynomial
function
3rd order polynomial
function
4th order polynomial
function
Fixed effects:
Estimate
Std.
Error t value Estimate
Std.
Error t value Estimate
Std.
Error t value
(Intercept) -139.800 5.522 -25.311 -141.200 5.536 -25.507 -142.700 5.533 -25.785
poly(Risk, 2)1 7.595 4.367 1.739 8.285 4.495 1.843 6.710 3.960 1.695
poly(Risk, 2)2 -0.909 2.305 -0.394 -3.194 2.401 -1.330 -3.570 2.396 -1.490
poly(Risk, 3)3 7.299 2.255 3.237 7.623 2.249 3.389
poly(Risk, 4)4 -8.916 2.175 -4.100
OcctypeqFrevisit 38.460 9.409 4.087 39.440 9.396 4.198 42.200 9.400 4.490
OcctypeqTitle -4.846 14.600 -0.332 -2.184 14.630 -0.149 -0.666 14.600 -0.046
Purchaseyear 0.078 0.003 28.218 0.078 0.003 28.411 0.079 0.003 28.687
poly(Risk,
2)1:OcctypeqFrevisit -0.282 3.760 -0.075 -0.620 3.819 -0.162 0.995 3.790 0.262
poly(Risk,
2)2:OcctypeqFrevisit 3.803 3.656 1.040 7.375 3.794 1.944 7.527 3.773 1.995
poly(Risk,
3)3:OcctypeqFrevisit -1.623 3.551 -0.457 -2.734 3.575 -0.765
poly(Risk,
4)4:OcctypeqFrevisit 5.471 3.317 1.649
poly(Risk,
2)1:OcctypeqTitle -13.260 5.475 -2.422 -15.580 5.788 -2.692 -14.190 5.724 -2.479
poly(Risk,
2)2:OcctypeqTitle 9.545 4.436 2.152 11.470 4.498 2.549 12.490 4.657 2.682
poly(Risk,
3)3:OcctypeqTitle -2.934 4.365 -0.672 -2.807 4.433 -0.633
poly(Risk,
4)4:OcctypeqTitle 5.022 4.695 1.070
OcctypeqFrevisit:Purchase
year -0.019 0.005 -4.087 -0.020 0.005 -4.197 -0.021 0.005 -4.490
OcctypeqTitle:Purchaseyea
r 0.003 0.007 0.362 0.001 0.007 0.180 0.001 0.007 0.076
Random effects:
Groups Name
Var. Std.Dev
Var. Std.Dev
Var. Std.Dev
Risktypeq:Proptypeq
(Intercept) 0.001 0.038 0.003 0.053 0.001 0.039
Risk 0.010 0.100 0.012 0.111 0.008 0.087
Proptypeq (Intercept) 1.419 1.191 1.421 1.192 1.388 1.178
Risk 0.002 0.041 0.001 0.030 0.001 0.026
Residual 2.168 1.472 2.159 1.469 2.149 1.466
Number of obs: 3028
groups: Risktypeq:Proptypeq 6; Proptypeq, 3
Scaled residuals:
Min Med. Max Min Med. Max Min Med. Max
-4.254 0.011 4.068 -4.281 -0.006 4.089 -4.316 -0.008 3.906
Model: Linear mixed model fit by REML ['lmerMod']
Formula price~poly(Risk,)*Occtype
q+Purchaseyear*Occtypeq+(
Risk|Proptypeq/Risktypeq)
price~poly(Risk,)*Occt
ypeq+Purchaseyear*Occt
ypeq+Risk|Proptypeq/Ri
sktypeq)
price~poly(Risk,4)*Occt
ypeq+Purchaseyear*Occty
peq+(Risk|Proptypeq/Ris
ktypeq)
REML criterion at
convergence: 10956.2 10928.9 10898.4
The effect of “titled property” purchase is to make the marginal contribution of perceived
transaction failure risk (1st order) to price significantly negative. Similarly, the positive effect of
18
purchase year on prices is reversed if the occupation strategy is “frequent visitation”. Property
purchasers intending to frequent over their newly acquired properties seem to increasingly pay
lower price over time when compared to “effective occupiers”. The two informal property
strategies contradict the theoretical proposition propounded earlier since they exhibit a positive
price-risk relationship in all the polynomial orders considered. Thus it is conceived that
informality is inversely related to formality and that the lower perceived risks of formality
induces a risk-price premiums. Informal property price-risk preferences are upward sloping
suggesting that buyers would pay higher for additional perceived risks at some point which is
equivalent to saying that informal property purchasers are risk lovers or risk neutral while formal
property purchasers are risk averse.
(a) 2
nd order polynomial function (b) Third order polynomial function
(c) Fourth order polynomial function
Figure 5: Trends in the relationship between transaction failure risks at purchase and property prices
Figure 5 visualises the relationship between purchase price and pre-transfer transaction failure
risks. As predicted in the theoretical exposition, formally titled properties sell at a higher price
among risk averse purchasers potentially suggesting that a title induces a lower transaction
Occtypeq*Price effect plot
Purchase price (Natural log)
Pe
rce
ive
d r
isk a
t tr
an
sa
ctio
n(l
og
od
d s
ca
le)
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
6 8 10 12 14 16 18
Occtypeq
Effectocc Frevisit Title
Occtypeq*Price effect plot
Purchase price (Natural log)
Pe
rce
ive
d r
isk a
t tr
an
sa
ctio
n(l
og
od
d s
ca
le)
-7
-6
-5
-4
-3
-2
-1
0
6 8 10 12 14 16 18
Occtypeq
Effectocc Frevisit Title
Occtypeq*Price effect plot
Purchase price (Natural log)
Pe
rce
ive
d r
isk a
t tr
an
sa
ctio
n(l
og
od
d s
ca
le)
-10
-8
-6
-4
-2
0
6 8 10 12 14 16 18
Occtypeq
Effectocc Frevisit Title
19
failure risk which fetches a premium over and above informal properties. Figure 7 on the other
hand plots the relationship between perceived transaction failure risk at purchase and property
prices. It is evident that there was a surge in perceived risk between 1960 and 1975. Prior to the
surge, formal and informal transaction failure risks differentials were relatively smaller
compared to after the surge. The rapid increase in formal property risks has made them slightly
riskier over time than informal ones given the occupation strategies subsequent to purchase.
Although formally titled properties are perceived riskier at purchase, it is evidence that the
formal-informal risk gap is marginal to the extent that all traded properties are equally weighted
in terms of perceived transaction failure risks.
(a) 2nd order polynomial function (b) 4th order polynomial function
(c) 6th order polynomial function
Figure 6: Trends in perceived transaction failure risk in residential property purchase over time
To further visualise the price-risk relationship Figure 8, provide evidence on price differential for
each level of risk for the different informal occupation strategies when compared to formal ones.
Occtypeq*Purchaseyear effect plot
Purchase year
Pe
rce
ive
d r
isk a
t tr
an
sa
ctio
n(l
og
od
d s
ca
le)
-1.6
-1.4
-1.2
-1.0
-0.8
-0.6
1940 1950 1960 1970 1980 1990 2000
Occtypeq
Effectocc Frevisit Title
Occtypeq*Purchaseyear effect plot
Purchase year
Pe
rce
ive
d r
isk a
t tr
an
sa
ctio
n(l
og
od
d s
ca
le)
-1.8
-1.6
-1.4
-1.2
-1.0
-0.8
1940 1950 1960 1970 1980 1990 2000
Occtypeq
Effectocc Frevisit Title
Occtypeq*Purchaseyear effect plot
Purchase year
Pe
rce
ive
d r
isk a
t tr
an
sa
ctio
n(l
og
od
d s
ca
le)
-1.5
-1.0
-0.5
0.0
0.5
1940 1950 1960 1970 1980 1990 2000
Occtypeq
Effectocc Frevisit Title
20
In this comparison it can be observed that prices are regressed on risk rather than the other way
round which has just been presented. At low risk it is clear that formally titled properties fetches
a risk-price premium over and above informal properties. As the perceived risk increases prices
also increase and is clear that informal property prices rises faster to catch-up with formal ones.
As a result at higher risk it is not evident whether formal and informal properties are priced
differently; price-risk premiums tend to disappear. The diagram also show that to some extend
certain informal properties are expensive than formal ones at relatively higher risk. This
observation also supports the previous observations on Table 5 that formally titled properties
fetches a risk-price premium in as long as it induces a lower perceived transaction failure risk. In
case the perceived transaction failure risks between formal and informal properties are the same
there are basically no strong reasons as to why they should be priced differently, formal-informal
price differential diminishes at higher perceived transaction failure risks.
(a) 2
nd order polynomial function (b) 3
rd order polynomial function
(c) 4th
order polynomial function
Figure 7: Price differentials for formal and informal occupation strategies given the perceived transaction
failure risks
Occtypeq*Risk effect plot
Perceived risk at transaction(log odd scale)
Pu
rch
ase
pri
ce
(N
atu
ral lo
g)
14.2
14.4
14.6
14.8
15.0
15.2
15.4
-4 -3 -2 -1 0 1 2
Occtypeq
Effectocc Frevisit Title
Occtypeq*Risk effect plot
Perceived risk at transaction(log odd scale)
Pu
rch
ase
pri
ce
(N
atu
ral lo
g)
14.0
14.5
15.0
15.5
-4 -3 -2 -1 0 1 2
Occtypeq
Effectocc Frevisit Title
Occtypeq*Risk effect plot
Perceived risk at transaction(log odd scale)
Pu
rch
ase
pri
ce
(N
atu
ral lo
g)
13.5
14.0
14.5
15.0
15.5
-4 -3 -2 -1 0 1 2
Occtypeq
Effectocc Frevisit Title
21
Given the above notable observations, it is imperative to examine the estimated risk-price
differentials between formal and informal traded properties in the municipality. Table 7 show
that the net purchase price for LG over EO properties is lower by around Tshs. 1.1 Mil if the
perceived transaction failure risk is high than when it is low and is around Tshs. 0.1 Mil lower
for LG over VIS plots. Such net purchase price is around Tshs 1.7 Mil higher for LG over VIS
properties when perceived title risks is high than when it is low; It is higher by Tshs 0.15 Mil for
unfinished EO housing; around Tshs 1.8 Mil higher for unfinished VIS housing and Tshs 0.08
above EO plots. The net purchase price for LG properties are higher by around Tshs. 7.8 Mil
over and above EO housing if the perceived sellers‟ credibility induced transaction failure risk is
high than when it is low; higher by around Tshs 0.13 Mil for EO plots and by around Tshs. 0.07
Mil over and above VIS plots. Contrariwise, the net purchase price for LG over EO housing is
lower by around Tshs. 3.0 Mil if the sellers‟ credibility induced transaction failure risk is high
than when it is low; It is lower by around Tshs 9.3 Mil over unfinished EO housing and Tshs 2.3
Mil for unfinished VIS housing.
The overall net purchase prices for LG over non-LG residential properties are on average lower
by around Tshs 349,000/= if the perceived transaction failure risk is high than when it is low
(risk averse households). At the general level it is appropriate to suggest that risk averse
purchasers of residential properties pay a relatively higher price for formal properties because
such purchases also entails a lower transaction failure risk. Such lower risk is however, relevant
only among unfinished housing purchasers. For purchasers of both plots and finished houses, a
net risk-price premium is likely when the occupation strategy is “frequent visitation” than when
“effective occupation” is chosen. For formally titled finished housing, purchasers pay higher
prices but such premiums are in no way associated with lower perceived transaction failure risks.
For plot purchasers, purchase price-risk premiums are dependent on the anticipated occupation
strategy. Legal titles have a small risk-price premium of only around Tshs. 5,000/= over
“effective occupation” at higher perceived risk but have a relatively higher discount for VIS plot
at high than low perceived risk yielding a positive net risk-price premium of around Tshs.
16,000/=. These marginal values however suggest that plots do fetch the same price regardless
of whether they have a documented title or not.
The preceding observations suggest that, the effect of both higher sellers‟ credibility and title
induced transaction failure risks are ambiguous for finished houses and plots but for unfinished
properties, a relatively higher perceived title induced transaction failure risk induces a higher
purchase price while a higher sellers‟ credibility transaction failure risk induces a lower purchase
price for formal than informal properties though on average risky unfinished houses fetches a
lower price. The sellers‟ moral hazards seem to be inversely correlated to the potential for
adverse selection risk emanating from title quality among unfinished housing purchasers. This
observation provides some evidence that purchasers of unfinished residential properties use price
to signal title quality and to mitigate sellers‟ credibility risks, the dual function of property prices
in asymmetric residential property markets.
Discussion and conclusion
The above noted observation has important implications in terms of strategies adopted by
occupiers of informal land. The legal titles price premiums over and above informal ones could
be a decisive factor in the decision of whether to purchase an informal or a formal property. To
22
examine the choices available to purchasers, Table 5 defines different informal occupation
strategies based on anticipated risk-price premiums. The discussion that follows details out these
strategies as implemented by risk averse and risk lovers (risk neutral) purchasers. Risk averse
purchasers do pay increasing amounts to reduce risk hence face a positive risk-price premiums
while risk lovers pay higher amount for increasing risk hence face a negative risk-price
premiums.
Table 5: Purchase risk-price premiums in Tshs (2010 prices)
Risk Finished house Unfinished house Plots
LG-EO LG-VIS LG-EO LG-VIS LG-EO LG-VIS
Title induced risk price premiums in Tshs (2010 prices)
<50
(Low)
MIN (920,485.78) 1,996,572.24 (736,081.51) 602,340.01 205,709.94 212,156.05
AVG 1,678,919.42 430,515.37 (121,012.19) (235,047.22) (218,711.38) (177,686.04)
MAX 3,668,389.02 2,618,455.16 826,674.97 332,216.36 (485,841.66) (360,571.34)
>50
(High)
MIN 527,734.24 3,903,831.33 - 1,501,879.98 264,228.84 (312,240.96)
AVG 538,084.53 2,162,827.50 27,848.97 1,585,149.17 (136,171.47) (277,545.85)
MAX 381,265.36 807,952.13 169,057.41 1,754,206.59 13,736.80 (2,763.88)
DIFF 1,140,834.90 (1,732,312.13) (148,861.16) (1,820,196.40) (82,539.91) 99,859.81
Sellers' credibility induced risk price premiums in Tshs (2010 prices)
<50
(Low)
MIN (716,341.15) 694,178.89 2,991,473.60 422,138.07 127,116.35 109,097.90
AVG 2,080,212.41 1,946,580.53 4,499,275.99 (9,012.72) 13,863.73 76,235.11
MAX 4,564,050.01 2,538,654.36 5,766,110.70 (405,933.68) 70,206.95 177,912.02
>50
(High)
MIN 4,498,282.67 1,267,735.13 (3,958,298.64) 1,018,126.86 399,679.13 369,469.52
AVG 9,849,098.48 (1,034,032.62) (4,875,333.76) (2,350,807.85) 146,441.37 144,817.78
MAX 14,879,221.88 436,123.45 (5,954,145.06) (5,319,256.55) (93,334.41) (87,823.20)
DIFF (7,768,886.07) 2,980,613.15 9,374,609.75 2,341,795.13 (132,577.64) (68,582.67)
Risk reduction price premiums in Tshs
<50
(Low)
MIN (818,413.47) 1,345,375.56 1,127,696.04 512,239.04 166,413.14 160,626.97
AVG 1,879,565.92 1,188,547.95 2,189,131.90 (122,029.97) (102,423.83) (50,725.47)
MAX 4,116,219.51 2,578,554.76 3,296,392.83 (36,858.66) (207,817.35) (91,329.66)
>50
(High)
MIN 2,513,008.45 2,585,783.23 (1,979,149.32) 1,260,003.42 331,953.99 28,614.28
AVG 5,193,591.50 564,397.44 (2,423,742.39) (382,829.34) 5,134.95 (66,364.03)
MAX 7,630,243.62 622,037.79 (2,892,543.82) (1,782,524.98) (39,798.80) (45,293.54)
DIFF (3,314,025.59) 624,150.51 4,612,874.29 260,799.37 (107,558.78) 15,638.57
DIFF (1,344,937.54)
2,436,836.83
(45,960.10)
For the case of finished housing, the data in Table 5 suggest that if the source of risk is a
doubtful title; a risk averse purchaser would pay a risk-price premium for a formally titled
property over “effective occupation” and if the source of risk is doubtful seller‟s credibility, it is
the risk lovers who pay a risk-price premium. The net effect is negative (3.3 Mil) suggesting that
“risk loving” will dominate in choosing between a formally titled property and “effective
occupation”. When formally titled finished housing purchases are compared with “frequent
visitation” it is observed that, if the source of risk is a doubtful title document; a risk lover
purchaser would pay a risk-price premium while if the source of risk is doubtful seller‟s
credibility, it is the risk averse purchaser who pay a risk-price premium. The net effect is
positive (624,000) suggesting that risk aversion dominates in choosing between formal housing
and “frequent visitation”. If the anticipated informal enforcement mechanism is “effective
occupation” then, purchase of formally titled finished housing is preferred among risk lovers and
if the anticipated enforcement mechanism is “frequent visitation” formality would be more
preferred by risk averse households.
This study notes generally that formally titled finished houses have on average higher prices
compared to informal houses. Such higher prices are however, hardly explainable in terms of the
23
power of titles to reduce transaction failure risks. Based on Figure 4, the only non joint
determinants of price and risk are “ward age” and “mobility after purchase”. Older
ward/settlement housing and ineffectively occupied or within residency ward houses (taking
advantage of both social connectivity and information) tend to fetch a lower price. These
observations suggest that prices of finished houses are lower because most of them are in older
inner city settlements and were purchased by people who were living within the settlements at
the time of purchase. It should further be noted that some older inner city settlements have
undergone regularisation where titles have been issued i.e. Hananasif (WAT Human Settlement
Trust, 2010). However the fact that these settlements started as informal, the legacy effect of
informality guarantees poor neighbourhood amenities despite being formal (Navarro & Turnbull,
2010). It is unlikely for many such areas to obtain a significantly higher premium out of title, the
premium must be determined outside titles.
Figure 8: Valuation of different occupation strategies in terms of risk-price premiums
The strongest justification for lack of premium for finished housing could be linked to the role of
social connectivity. Table 4 suggest that the effect of not being socially connected is to lower the
purchase price of formally titled houses below informal ones. Potentially social connectivity
plays a significant role in both formal and informal housing transactions (Selod & Tobin, 2013).
Risk-price premium
349,000
Unfinished
House
(985,000)
Plot
9,000
Title induced
risks
(424,000)
Sellers’
credibility risks
1.1 Mil
LG-EO
1.1Mil
House
(296,000/=)
LG-VIS
(1.7 Mil)
LG-EO
(150,000)
LG-VIS
(1.8 Mil)
LG-EO
(83,000l)
LG-VIS
100,000
Unfinished
House
5.9 Mil
Plot
(100,000)
LG-EO
(7.8 Mil)
House
(2.4 Mil)
LG-VIS
3 Mil
LG-EO
9.4 Mil
LG-VIS
2.3 Mil
LG-EO
(133,000)
LG-VIS
(69,000)
(108,000)
261,000
4.6 Mil
624,000
(3.3 Mil)
16,000
(1.3 Mil)
2.4 Mil
(46,000)
349,000
24
For finished houses, most of which are traded in the secondary market where habitation by the
original owner was overt prior to sale. As a result confirmation of the real owner does not
require a title rather communication with the neighbours and local leaders (Kombe, 1994). By so
doing one can get all title information necessary to make a purchase. As a result documented
titles tend to have limited contributions to observable prices of finished houses.
For the case of unfinished houses, if the source of risk is a doubtful title document; a risk lover
would pay a risk-price premium for a formally titled property over “effective occupation” and if
the source of risk is doubtful seller‟s credibility, it is the risk averse purchaser who pay a risk-
price premium. When formally titled unfinished housing purchases are compared with “frequent
visitation” the same pattern in risk-price premium are observed. The net effect in the former
case is positive (4.6 Mil) while in the later case it is (261,000). In either case the observations
suggests that risk aversion is the best strategy in the purchase of formally titled unfinished
housing regardless of the anticipated informal strategy subsequent to purchase.
The observations for unfinished houses provide strong justifications for using a documented title
to facilitate transactions. Contrary to finished houses, unfinished ones have limited reputable
social connectivity to rely upon and it might be costly to attempt to establish such connectivity
prior to purchase. This is so since many unfinished houses are under the control of different
people most of which construction supervisors or some technicians who have been entrusted by
the owner to oversee the construction process. Some owners would hire private guards or allow
some of their relatives to live in their unfinished houses while they are completing them. The
result of these interactions is that a bonafide neighbour or even a local leader may not be able to
exactly identify the true owner who is authorised to transact. Under such an environment a
documented title turns out to be highly valuable.
For the case of vacant plots, if the source of risk is a doubtful title documents; a risk lover
purchaser would pay a risk-price premium for a formally titled property over “effective
occupation” and if the source of risk is doubtful seller‟s credibility, it is the risk averse who pay a
risk-price premium. The net effect is negative (108,000) suggesting that risk loving will
dominate in the purchase of formally titled plots against those for which “effective occupation”
is anticipated as an enforcement mechanism. When formally titled plots purchases are compared
with “frequent visitation” it is observed that, if the source of risk is a doubtful title documents; a
risk averse purchaser would pay a risk-price premium while if the source of risk is doubtful
seller‟s credibility, it is the risk lover purchaser who pay a risk-price premium. The net effect is
positive (16,000) suggesting that risk aversion will dominate in the purchase of formally titled
plots against those for which “frequent visitation” is anticipated. Therefore, if the anticipated
informal enforcement mechanism is “effective occupation” then, formally-titled finished housing
purchase is the best strategy among risk lovers and if the enforcement mechanism is “frequent
visitation” acquisition of formally titled plots is the best strategy among risk averse households
The price premiums with regard to vacant plots are however marginal, suggesting that there are
no good reasons for formal and informal plots to be purchased at different prices. Potentially
three reasons can explain this pattern of behaviour in the municipality. The first is related to the
moderating effect of government plot allocations in inner city wards which were conducted in
early post independence and in the 1970s (Kironde L. , 2006; Kyessi & Sekiete, 2014). The
25
effect of government allocation is to make prices lower at the time of allocation since the
governments provide land the cost of which is covered through budgetary allocation. There are
also major government allocations projects which have been conducted recently though many
such projects were implemented in the outskirt (Kironde J. , 2015). In these recent projects cost
recovery was implemented where by government allocation prices were slightly higher though
not in line with market prices.
The marginal risk-price premiums of formal over informal plots can also be linked to rapid
increase in the prices of informal properties over time. That is informal property prices may be
increasing faster than formal ones. Although evidence in this study is scanty on this matter, it is
anticipated that as long as formal prices are increasing slowly and are above informal ones,
convergence of prices will be the ultimate outcome. Therefore marginal formal-informal price
differential can be attributed to the dynamic convergence proposition. The last reason that can
explain the limited formal-informal plot price differentials is the undeveloped secondary markets
for plots following government allocations. Although plots can cheaply be gotten through
government allocation, a well developed secondary market would have pulled formal prices
away from informal one. When the formal plot sales in the secondary market are doomed
speculations dominates. Given the limited options for investment in developing countries,
Tanzania inclusive, the majority rely on land speculations as the most profitable investment
option (Jimenez, 1984; Buckley & Kalarickal, 2005; Fekade, 2000). Prices are set artificially too
high to deter immediate purchase. As a result the majority of plot seekers cluster in informal
areas where given the availability and willingness to trade, prices are generally lower. As noted
above, the increased competition has however, increased informal property prices faster than
formal ones.
26
References
Alananga, S. (2015). Intra-urban residential mobility and tenants' workplace choices in Kinondoni
municipality. Habitat International , 49 (2015), 45-55.
Ali, M. H., & Sulaiman, M. S. (2006). The Causes and Consequences of the Informal Settlements in
Zanzibar. FIG Congress (pp. 1-17). Munich: FIG.
Boucher, S. (2005). The Impact of „„Market-Friendly‟‟ Reforms on Credit and Land Markets in Honduras
and Nicaragua. World Development , 33 (1), 107–128.
Buckley, R. M., & Kalarickal, J. (2005). Housing Policy in Developing Countries Conjuctures and
Refutations. The World Bank Research Observer , 20 (2), 233-257.
Collin, M. (2013). Peer Effects in Adoption of Property Rights: Evidence from Urban Tanzania. Oxford:
Unpublished.
Collin, M., Sandefur, J., & Zeitlin, A. (2015). Falling Off the Map: The Impact of Formalizing (Some)
Informal Settlements in Tanzania. CSAE Working Paper WPS/2015-09 .
Durand-Lasserve, A., Durand-Lasserve, M., & Selod, H. (2013). A Systemic Analysis of Land Markets
and Land Institutions in West African Cities Rules and Practices: The Case of Bamako, Mali.
Research Support Team. Washington: The Word Bank.
Eliwaha, M. D. (2011). Land Acquisition for Urban Expansion: Process and Impacts on Livelihoods of
Peri Urban Households, Dar es Salaam, Tanzania. Licentiate Thesis, Swedish University of
Agricultural Sciences, Reports Department of Urban and Rural Development, Uppsala.
Fekade, W. (2000). Deficits of Formal Urban Land Management and Informal Responses under Rapid
Urban Growth, an International Perspective. Habitat International , 24 (2000), 127-150.
Field, E. (2003, 11). Property Rights and Household Time Allocation in Urban Squatter Communities:
Evidence from Peru. Research Program in Development Studies Working Paper , p. 42.
Friedman, J., Jimenez, E., & Mayo, S. K. (1988). The Demand for Security of Tenure in Developing
Countries. Journal of Development Economics , 29 (1988), 185-198.
Hansen, J. D., & Skak, M. (2008). Adaptation Investments and Homeownership. Journal of Housing
Economics , 17 (2008), 102–115.
Jehle, J., & Reny, P. J. (2011). Advanced Microeconomic Theory (Third ed.). Essex, England: Pearson
Education Limited and Associated Companies throughout the world.
Jimenez, E. (1984). Tenure security and Urban Squating. The Review of Economics and Statistics , 66 (4),
556-567.
Kapoor, M., & le-Blanc, D. (2008). Measuring Risk on Investment in Informal (Illegal) Housing: Theory
and Evidence from Pune, India. Regional Science and Urban Economics , 38 (2008), 311–329.
Kironde, J. (2015). Good governance, efficiency and the provision of planned land for orderly
development in African cities: The case of 20,000 planned land plots project in Dar es Salaam,
Tanzania. Current Urban Studies , 3 (2015), 348-367.
Kironde, J. (2000). Understanding Land Markets in African Urban Areas: The Case of Dar Es Salaam,
Tanzania. Habitat International , 2000 (24), 151-165.
Kironde, L. (2006). Issuing of Residential Licences to Landowners in Unplanned Settlements in Dar Es
Salaam Tanzania. Nairobi: UN-Habitat.
Kombe, W. (1994). The Demise of Public Urban Land Management and the Emergence of Informal Land
Markets in Tanzania A Case of Dar-es-Salaam City. Habitat International , 18 (1), 23-43.
Kyessi, A. G., & Sekiete, T. (2014). Formalising Property Rights in Informal Settlements and Its
Implications on Poverty Reduction: The Case of Dar es Salaam, Tanzania. Business and
Economics , 5 (12), 2352-2370.
Lanjouw, J. O., & Levy, P. I. (1998). Untitled: A Study of Formal and Informal Property Rights In Urban
Ecuador. The Economic Journal , 112 (October), 986–1019.
27
Limbumba, T. M. (2010). Exploring Social-cultural Explanations for Residential Location Choices The
Case of an African City - Dar es Salaam . Royal Institute of Technology, Department of Urban
Planning and Environment. Stockholm: KTH.
Manaster, K. A. (1968). The Problem of Urban Squatters in Developing Countries: Peru . Wisconsin Law
Review , 23 (1968), pp. 23-61.
MKURABITA. (2008). Property and Business Formalisation Program Volume II; Property
Formalisation Reform Outlines and Packages for Tanzania Mainland. Tanzania Business and
Property Formalisation Programme, Program Management Unit, Dar es salaam.
Mosha, L. H. (2012). Housing and land challenges in Tanzania. Prime Journal of Social Science (PJSS) ,
1 (6), 113-120.
Mushumbusi, M. Z. (2012). Formal and Informal Practices for Affordable Urban Housing Case Study:
Dar Es Salaam, Tanzania. Royal Institute of Technology, Department of Urban Planning and
Environment. Stockholm: KTH.
National Bureau of statistics (Tanzania). (2009). Basic Facts and Figures on Human Settlements in
Tanzania. Dar es salaam: Ministry of Finance.
National Bureau of Statistics -Tanzania. (2013). Population of Kinondoni Municipal Council Number of
Household. Census 2012 . Dar es salaam, Tanzania.
Navarro, I. A. (2008). Housing Tenure, Property Rights, and Urban Development in Developing
Countries. Dissertation, Georgia State University, Public Management and Policy: Paper 22,
Georgia.
Navarro, I. A., & Turnbull, G. K. (2010). The Legacy Effect of Squatter Settlements on Urban
Redevelopment. World Institute for Development Economics Research. Leibniz: Leibniz
Information Centre for Economics.
Payne, G. (1996). Urban Land Tenure and Property Rights in Developing Countries: A Review of The
Literature. London: Overseas Development Administration.
Payne, G. (2000). Urban Land Tenure Policy Options: Titles or Rights. World Bank Urban Forum (p. 14).
Virginia: Geoffrey Payne and Associates London.
Penrose, K., de Castro, M. C., Werema, J., & Ryan, E. T. (2010). Informal Urban Settlements and
Cholera Risk in Dar es Salaam, Tanzania. (A. I. Ko, Ed.) PLoS Negl Trop Dis , 4 (3).
Rath, K. C., & and Routray, J. K. (1997). Plot Acquisition for Self-build Housing Problems in
Bhubaneswar City,India. Land Use Policy, , 14 (2), 81-97.
Rose, S. E. (2006). Tenure Security and Household Labor Decisions: The Effect of Property Titling on
Labor Force Participation in Urban Ecuador. Georgetown University, Graduate School of Arts
and Sciences. Washington, DC: Georgetown University.
Selod, H., & Tobin, L. (2013). City Structure and Informal Property Rights in West Africa: Theory and
Evidence. Paris School of Economics. Paris: Unpublished.
Sheuya, S. A. (2010). Informal Settlement and Finance in Dar es Salaam Tanzania. United Nations
Human Settlements Programme. Nairobi: UN-Habitat.
Sivam, A. (2002). Constraints Affecting the Efficiency of the Urban Residential Land Market in
Developing Countries: A Case Study of India. Habitat International , 26 (2002), 523–537.
Takeuchi, A., Cropper, M., & Bento, A. (2006). The Welfare Effects of Slum Improvement Programs: The
Case of Mumbai. World Bank.
Tinsley, E. A. (1993). The Mechanics of Informal Land and Housing Markets: A Theoretical Exposition.
Massachunsset: MIT.
UCLA. (n.d.). Introduction to SAS. Retrieved October 20, 2016, from UCLA: Statistical Consulting
Group: http://www.ats.ucla.edu/stat/r/faq/reshape.htm
Varian, H. (1992). Microeconomic Analysis (Third ed.). New York: W. W. Norton & Company, Inc.
Vincent, O. O. (2009). Exploring Spatial Growth Pattern of Informal Settlements through Agent-based
Simulation. Enschede: ITC.
28
WAT Human Settlement Trust. (2010). Documentation of Reguralisation Experience of Informal
Settlements In Kinondoni Municipality in Dar es Salaam: Experience of Hananasif. Dar es
Salaam: WAT Human Settlement Trust.
Yonder, A. (1987). Informal Land and Housing Markets: The Case of Istanbul, Turkey. Journal of the
American Planning Association , 53 (2), 213-219.
Young, G. F., & Flacke, J. (2010). Agent-based Model of the Growth of an Informal Settlement in Dar es
Salaam, Tanzania: An Empirically Informed Concept. In D. A. Swayne, W. Yang, A. A. Voinov,
A. Rizzoli, & F. T (Ed.), International Congress on Environmental Modelling and Software (p.
8). Ottawa: International Environmental Modelling and Software Society (iEMSs).
