In many cities in low- and middle-income countries, a sizable proportion of households live in informal housing. This paper proposes a framework for analysing the connections between formal and informal housing markets, both at the city-level in terms of the mechanisms that link the two housing markets, and at the individual-level in terms of the preferences of residents for whom informal housing is a possible housing choice. The framework identifies the mechanisms by which formal and informal housing markets are connected at the city-level, including competition, disamenity or negative spillover, and redevelopment or positive spillover. Informal housing in Mumbai serves as an empirical case to demonstrate the applicability of this framework. Results from field research suggest that the connection between formal and informal housing markets is dynamic – it can work in different causal directions, change over time and vary by scale. The preferences of residents in informal housing are diverse, and have varying implications for urban policy.