Income inequality and house prices in the United States: A panel VAR analysis

This paper examines empirically the dynamic relationship between upper-end measures of income inequality, such as top 1% income share, and house price-to-income ratio (HPIR) by employing panel VAR technique over the period from 1975 to 2015 using a panel of annual U.S. state-level data. Impulse response analysis provides that inequality positively affects HPIR. This finding is robust to changes in the measures of inequality used, as well as to VAR order. In contrast, there exist no significant impacts of HPIR shocks on inequality in the baseline model. The PVAR in the reverse order shows that HPIR has a positive contemporaneous effect on inequality but the effect dies out within two years. This finding implies that the positive correlation between inequality and house prices is mainly driven by the positive effect of inequality on house prices.