The occupants of a former sex motel on the city's outskirts fear they have been left behind by the boom in Brazil

Rosinéia Gonçalves was pregnant and living under a tree outside Rio's Museum of Modern Art. Francinéia dos Santos was forced from her shack in Grota, a gritty suburban slum, for reasons she would rather not explain. Monique da Silva lost her job as a street hawker of cotton swabs and could not pay her rent.

Three homeless women desperate for shelter, one new address: the Oasis, an abandoned three-storey sex motel in São João de Meriti in north-west Rio, now home to 300 permanent guests.

With the 2014 World Cup and 2016 Olympics fast approaching, Rio authorities are racing to build new hotels to cope with the influx of thousands of tourists. But the three women and other occupants of this giant squat – one of dozens in Rio's decaying industrial outskirts – just want homes.

"We don't care about the World Cup. We care about being able to give our kids a dignified upbringing, access to water, to sanitation," said Da Silva, 25, a mother of three, during a tour of the crowded squat, a 40-minute drive from the tourist districts of Copacabana and Ipanema.

"This is the kitchen – and the bedroom," she joked, opening the door to Suite 221, once used by sex workers and clients for fleeting roadside liaisons. "This is my humble shack."

Rio's property market is booming, with prices soaring as the city gears up to host the two great sporting events. But Rio – and Brazil as a whole – continues to suffer from a chronic housing deficit, with an estimated shortfall of 7m homes.

In recent years the federal government has battled to reduce the shortfall. In 2009, Brazil's then president Luiz Inácio Lula da Silva launched My House, My Life, an ambitious R$34bn (£12bn) programme intended to create at least 1m low-cost homes for the poor.

But tens of thousands of homeless Brazilians say their only option is an "occupation" of the abandoned factories, warehouses and sex motels that litter Rio's impoverished suburbs. One short stretch of the Via Dutra, the motorway linking Rio and São Paulo, is home to at least three major squats, two of them former hotels. Brazil Avenue, another main artery, is also flanked by "occupations" – among them the Borgauto, an abandoned car parts store.

Locals say the Oasis motel closed its doors to paying clients in the late 90s and was soon ransacked by looters. Copper pipes were torn from the walls and mirrors and basins disappeared.

Seven years ago the squatters moved in. In a country where up to 25% of birth certificates lack a father's name, many were single mothers. One resident, 39-year-old Maura Fernandes, has 14 children, no husband and no toilet.

Gracielle de Vasconcellos, 25, is a mother of three but lost a nine-month-old daughter to an infection caught in the motel. "When I came here there was nothing – no electricity, no water, just junk, crap and lots of filth," she said. "Thank God it's improved a lot since."

Most of the 121 families here are keen to check out as soon as possible but complain that government promises to rehouse them have not been fulfilled.

"It's better than paying rent or living on the streets," said Joana Batista Ferreira, 50, a maid who built a two-storey shack in the motel's old car park. "But of course we would go [if authorities helped]. We all want our own homes."

Dos Santos, 40, now sells 20p lollipops to support her six-month-old son. She is desperate to leave but cannot afford to return to the favela where she used to live. It was recently "pacified" by police, sending rents through the roof. "It's too expensive. I can't afford anything there. I hope they will get us out."

Others are grateful for their refuge in the Oasis, which they call the Condomínio Nova Esperança (New Hope Condominium).

"When I most needed something, this place helped me a lot," said Gonçalves, 35, a mother-of-four who fled a violent husband and lived on the streets before taking up residence in the motel. "I spent eight months on the streets. I've been through a lot," she said.

On the floor beside her one of her sons scooped a plate of rice and sliced hot dog into his mouth with a spoon and a biro.

The walls of the Oasis are daubed with the insignia of a local drug gang. Raw sewage trickles from an improvised network of plastic tubes strapped to its concrete shell. Many residents complain of lung infections and ringworm. No-smoking rules have not caught on.

But the motel offers at least a modicum of safety and infrastructure. Residents have access to two bars, a jukebox, a shop selling passionfruit lollipops and an evangelical church.

"My role is to try to improve the building and to sort out disputes between neighbours," said Jeremias Francisco Nascimento, 42, the squat's unofficial leader, who lives with his wife in Suite 214.

Nascimento, who works in a construction store near Copacabana beach, also took a stand against crack dealers trying to turn the Oasis into their HQ. He introduced an 11pm curfew and started the church, the Jesus Christ Rules ministry – a small room containing a tatty brown fridge, seven wooden pews and a drumkit. At the entrance he painted an extract from St Matthew's gospel: "Come to me, all you who are weary and burdened, and I will give you rest."

Last week the Getulio Vargas Foundation, a Brazilian thinktank, announced that this year inequality has hit its lowest level since the 60s, with poverty falling by nearly 8% last year.

Such progress has yet to be noted in the Oasis, home to some of the 351,000 people who, official figures say, still survive on less than $2 a day in Rio state.

Since 2010 authorities have been promising to relocate the families. They are still waiting. Marcia Rosario, São João de Meriti's communication secretary, said those who qualified for social housing would be relocated by the year's end. Other squats would not be included, she admitted. Many Oasis residents say they do not have the documents or the income to benefit.

Standing in her kitchen-cum-bedroom, which still features the garish blue and red tiles of a motel shower, Da Silva offered a blunt appraisal of her place in Brazil's booming economy. "They say this is the 'marvellous country'. Well it isn't all that marvellous, is it?"