Does Income Inequality Affect Housing Affordability? Evidence From OECD Countries

This paper investigates the causal effect of income inequality on housing affordability in 35 OECD countries from 2000 to 2021. Using an instrumental variables approach, we address endogeneity concerns by leveraging two exogenous instruments: tax progressivity (the marginal tax rate) and R&D expenditures. Our findings indicate that higher income inequality significantly deteriorates housing accessibility by increasing housing prices relative to income. The effect is particularly pronounced in low-growth periods, where stagnant wages fail to offset rising housing costs. We further explore key transmission mechanisms, including speculative investment, credit constraints, and inflation, which amplify the affordability crisis. Robustness checks using alternative instruments and measures of inequality confirm the stability of our results. Additionally, restricting the sample to European countries yields consistent findings, reinforcing the broader relevance of the conclusions. These insights highlight the need for policy interventions that address inequality as a structural determinant of housing affordability, including progressive taxation, financial regulations, and targeted housing policies.