Developing countries have been experiencing an accelerated urban growth with high levels of informal housing (houses that do not comply with property rights regime and urban regulations). This trend has brought renewed attention to the study of developing cities in general, and of the informal housing sector in particular. This study examines the relationship between land use regulation, housing price, and informality, in the metropolitan area of Curitiba, Brazil.

Using a simultaneous equation model, the study conducts a regression analysis to understand the magnitude of the effect of urban regulation on formal housing price and the effect of rising formal housing price on the quantity of informal housing. Three hypotheses are tested: (a) more restrictive land use regulation increases housing price in the formal housing market; (b) an increase in formal housing price causes the quantity of informal housing to rise; and (c) an increase in formal housing price in one geographic area causes the quantity of informal housing to rise in neighboring areas.

The study shows that for three regulatory variables - minimum plot area, minimum front setback and minimum frontage - land use regulations that limit the density of occupation have a significant positive effect on price. Regulatory variables that affect building height - maximum number of floors and floor-to-area ratio - have the opposite effect, possibly because single and multifamily units are not being analyzed separately.

The study finds that the price of formal housing has a negative effect on the quantity of informal housing in the same location, but this effect turns positive in the adjacent and more distant locations. As expected, the rise in formal housing price in one locality pushes people to the informal sector in more distant neighborhoods. However, in the same locality, a rise in price decreases the quantity of informal housing. The results indicate that high priced areas act as a bar to the development of the informal sector in the same locality (explaining the negative coefficients of formal housing price) while the informal sector is being pushed to the outskirts of the city (explaining why the lagged price variables become positive and have an increasing effect on the quantity of informal housing as the locations move further away from each other).