Income Inequality and Housing Affordability in OECD Countries: Evidence from an Instrumental-Variables Approach

This paper examines the relationship between income inequality and housing affordability in 35 OECD countries over the period 2000--2021. To address endogeneity concerns, we implement a two-stage least squares (2SLS) instrumental variables approach. Specifically, we use two instruments: tax progressivity, proxied by the marginal tax rate at 100% of the average wage, and R&D expenditures as a share of GDP. The results provide evidence consistent with the view that greater inequality worsens housing affordability by increasing the house price-to-income ratio. This effect appears to be stronger in low-growth environments, where weak income dynamics make it more difficult for households to absorb rising housing costs. We also examine several conditions under which this relationship becomes more severe. The findings suggest that the adverse effect of inequality is amplified by stronger housing price pressures, more expansionary credit conditions, and higher inflation, while the role of urbanization appears less systematic. The main results remain robust across alternative specifications, inequality measures, and subsample analyses. Overall, the paper suggests that housing affordability should be understood not only as a housing-market issue, but also in relation to broader distributional and macro-financial conditions.