One of the largest market failures has been the lack of reasonable housing options for the developing world urban poor. But this may soon be changing.

If you’ve been to a developing nation city in the past 20 years, you have likely observed the historically huge migration of people from rural to urban. This is driven by both the lack of opportunity in most rural areas and the relative increase in economic opportunity in the cities. The result is the massive growth of slums or so called informal or extra-legal housing. In fact, while most of the housing does not include any legal rights for the residents, an informal model has developed for buying, selling and renting which is managed through local systems which aren’t part of the government. The trouble is that since this system is outside the legal system that it costs more to administrate and property cannot be used for collateral and other important benefits. Hernando Desoto has written extensively about the issue of property rights.

Recently, The Economist reported that there are new approaches to creating affordable housing starting to show up in India. In Mumbai, a reasonable size flat can easily fetch $500,000 which is way above what most Indians can afford. So, developers are now building extremely basic flats outside the city (within commuting distance) targeting price points that are affordable for many more Indians. Ashish Karamchandani of Monitor Group India notes that there are already 23M urban families in India with incomes of 60,000-130,000 rupees ($1,200-$2,500) per year who can afford these new type of flats (typically with payments of 30-40% of their income).

When I met Ashish in Mumbai earlier this year, he was very excited about this opportunity to transform India urban housing. Ashish and his team have been working with Geoff Woolley, a social venture capitalist to develop a business plan for expanding low-cost urban housing in India. Geoff told me a few months back that once the financial crisis hit that suddenly all of the housing developers who had been 100% focused on [now over-built] high-end housing and had no interest in high-volume, lower cost housing were suddenly converts to the new opportunity. Geoff has also been negotiating with some of the microfinance organizations to find clients who were ready and financially qualified for the new housing. If they are able to pre-sell the low-cost housing, then the developer can dramatically reduce their financing costs which means that much of this savings can be passed along to the buyer with still a reasonable profit for the developer. A win-win!

I think India could be a pioneer in finding solutions to this important social problem which could possibly then be “exported” to other developing urbanscapes.