In physical terms, Addis Ababa is currently expanding at an increasingly rapid rate. Further, the city has been undergoing horizontal expansion as the major form of development throughout its history. The degree of the physical expansion of the built-up area of the city has outpaced the capacity of the city government’s infrastructure and basic urban services. Responsibility for this physical expansion has been attributed to legal landowners, land developers, and squatter settlements. In Addis Ababa, squatter settlements are mainly located in the peripheral areas of the city. This study focuses on squatter settlements that are found in Kolfe Keranio sub-city. The principal objective of the study is to assess the causes and consequences of squatter settlements in the light of unplanned expansion of the built-up area of the city. In order to achieve the study’s objective, a questionnaire survey covering a total of 230 sample household heads was carried out in kebele 04 and kebele 05 of Kolfe Keranio. Major findings of the study indicate that emergence of squatter settlements in the study area is a recent phenomenon that has occurred since 1994. High building standards of the legal houses, delayed responses and procedural problems of the legal land provision, and high housing rents in the city centre were identified by respondents as the causes of squatting in the study area. In addition, less government control of open spaces, the limited capacity of the code enforcement service to control illegal house construction, lack of a comprehensive legal response towards the problem of squatting, and the practice of land sale by land speculators as a means of making profit are other factors that have contributed to the emergence and proliferation of squatter settlements. Compared to the plot sizes of the legal land provision, the plot sizes of the squatter settlements in the study area are large and there are undeveloped vacant fenced plots between squatter housing units. Thus, land in the area is inefficiently exploited and the situation has greatly contributed to the unplanned and rapid horizontal expansion of the built-up area of the city.