Unexpected Guests: The Impact of Internal Displacement Inflows on Rental Prices in Colombian Host Cities

Emilio Depetris-Chauvin and Rafael J. Santos

Journal of Development Economics, Volume 134, September 2018, Pages 289-309

https://doi.org/10.1016/j.jdeveco.2018.05.006

Review

The article examines the causal impact of IDPs inflows on rental prices in Colombian cities, over the period 1999 to 2014. IDPs affect the housing market in several ways: (a) IDPs are poor and increase demand for low-income rental units; (b) IDPs provide cheap labor, which is partially absorbed by the construction sector; (c) competition in the labor market may depress wages for both IDP and non-IDP workers; (d) IDP inflows may be associated with deteriorating living conditions, which may translate into lower housing prices; (e) heterogenous effects are likely to emerge due to the segmentation of the market al.ong income levels, e.g. serviced, affordable land for low-income housing is scarce; and (f) local government may pursue policies to deter low-income households moving into their jurisdictions. Using an instrumental variables approach (to address the potential endogeneity of location choices of IDPs), the authors find that as IDP inflows increase, low-income rental prices increase and high-income rental prices decrease. Between 2004 and 2014, low-income rental prices increased by 14 percent and high-income rental prices decreased by 37 percent. The authors provide empirical evidence on two potential mechanisms for these findings. First, excess demand for low-income housing puts upward pressure on rental prices, but this is not followed by an increase in the supply of low-income housing. The authors show that while the total number of construction licenses does not vary with IDP inflows, construction licenses for low-income housing units are crowded-out by construction licenses for high-income housing units. Moreover, real wages in the construction sector are negatively affected by the arrival of IDP, suggesting IDPs fuel the construction sector in more affluent areas (lowering rental prices). And second, increasing supply of high-income housing coupled with rising homicide rates puts downwards pressure on rental prices. A 10 percent increase in IDP inflows increases the homicide rate by 6.4 percent with respect to its mean. This depresses rental prices, however in poorer areas, the boost in housing demand outweighs the impact of crime.

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