Are Cities with Growing Income Inequality Better for Investing?

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In advanced economies, income inequality tends to grow over time.

Last week, in our discussion about how residential real estate has outperformed equities over the past 145 years, we touched on how investment returns in an economy grow at nearly double the pace of the GDP. That means that the wealthy, whose income is largely based on returns from investments, will see faster income growth than the average employee, whose income is more closely tied to GDP growth.

There are other reasons for the expanding wealth gap, of course. Increasingly, we have a knowledge-based economy, which relies on high-skill workers. Meanwhile, there are fewer middle-income jobs available for low-skill workers, because we’ve been able to automate those tasks or outsource them to cheaper laborers overseas.

In the United States as a whole, the average income gap between the wealthiest 5 percent of households and the middle quintile (20 percent) of households grew to $308,600 between 2010 and 2015. That means that the gap widened by $58,800 over that five-year span.

Given that Silicon Valley and the Bay Area are high-profile magnets for high-skill, high-pay jobs—and considering them a real estate case study over the last decade—I wondered: Does a widening wealth gap predict real estate gains?

Here’s what I found after rooting through some basic economic data.

Related: Real Estate vs. Stocks: Which Has Performed Better Over 145 Years?

The Cities with the Fastest-Growing Income Gaps

First, let’s recap some quick data on the cities with the fastest growing income gaps.

Here are the ten cities with the fastest growing gaps between the wealthiest 5 percent and the middle quintile:

  1. San Francisco: The gap grew by $142,300 (size of 2015 gap: $492,00)
  2. San Jose: The gap grew by $122,100 (size of 2015 gap: $468,600)
  3. Grand Rapids: The gap grew by $99,300 (size of 2015 gap: $282,800)
  4. Austin: The gap grew by $97,100 (size of 2015 gap: $357,900)
  5. Des Moines: The gap grew by $90,500 (size of 2015 gap: $293,800)
  6. Seattle: the gap grew by $85,200 (size of 2015 gap: $344,600)
  7. Bridgeport: The gap grew by $81,300 (size of 2015 gap: $691,700)
  8. Charleston: The gap grew by $80,100 (size of 2015 gap: $302,800)
  9. Denver: The gap grew by $80,000 (size of 2015 gap: $347,100)
  10. Dallas: The gap grew by $77,700 (size of 2015 gap: $344,000)

And because we like charts, here’s one courteous of Bloomberg:

Now let’s switch gears and look at the income gap between the richest quintile (top 20 percent) and poorest quintile:

Surprised that the gap is smaller than the wealthy/middle-class gap? You shouldn’t be. The average member of the wealthiest 5 percent earns much, much more than her counterpart in the wealthiest 20 percent. People earning in the 80th percentile in income are normal folks who happen to have better jobs than most. They live in normal suburban homes and drive $35,000 cars instead of $20,000 cars.

People in the 95th percentile and up? These are your truly wealthy.

But I digress.

Home Price Appreciation

I gathered data from Zillow on residential real estate appreciation for the top five major cities for widening wealth inequality: San Francisco, San Jose, Seattle, Austin, and Boston. I had to skip Bridgeport and Grand Rapids, which are not major cities and for which I couldn’t find enough data.

First, I looked at the five years in question: 2010 through 2015. Nationally, U.S. home prices averaged an annual appreciation rate of 3.06 percent. Respectable if not impressive.

These top five cities averaged 7.28 percent home price appreciation each year though—more than double the national rate.

With that said, what I was really interested in was whether the widening wealth gap would predict future appreciation. So, I looked at home price appreciation for the following two years—2016 and 2017—to see how these cities compared to the national average.

Related: How the “Second Wave of Suburbanization” Will Change Housing Markets as We Know Them

Home price growth picked up, both nationwide and in these cities, as supply has remained incredibly low over the past several years. Nationwide, annual home value appreciation more than doubled. It’s up to 6.91 percent.

In these five cities, home price growth accelerated to nearly 10 percent (9.94 percent).

Was wealth inequality a predictor for greater-than-average home-price appreciation? I would argue that it was.

But that’s not the entire story, of course.


As someone who teaches rental investing, I was especially interested in how wealth inequality affected rents.

The story here proved more nuanced.

Nationwide, rents rose at an average annual pace of 2.09 percent from 2010 to 2015. In these top five major cities for the widening wealth gap? Rents positively exploded, shooting up at an average pace of 6.92 percent.

That’s over three times the pace of nationwide rent increases!

But in the following two years, the narrative shifted. Across the U.S., rents continued appreciating at almost the same pace: 2.06 percent. In these five cities, though, they fell to nearly the nationwide average—clocking in at 2.36 percent.

What happened? Why the fall back down to average?

Your guess is as good as mine. But the answer probably involves a variation of “that frenzied rent appreciation was unsustainable, and rent growth had to normalize eventually.”

Who wants to spend half their paycheck on rent? No one—no matter how much they earn (which we explored extensively when looking at how rents have slowed in major cities while seeing stronger growth in mid-tier cities).

With all that being said, if you noticed early on that the wealth gap was widening quickly in these cities, the smart move would have been to buy a rental property. Even over the past two years, these cities have still seen faster rent growth than the national average—not to mention the accelerated property appreciation.

The Backlash

Wealth inequality comes with plenty of drawbacks, even for the wealthy.

Politically, it creates a climate of anger, resentment, and crime.

Disagree? A quick look at San Francisco’s headlines over the past few years demonstrates just how much animosity toward landlords has evolved:

Then come the heavy taxes and regulation. Is it any surprise that these five cities have some of the strictest landlord-tenant laws in the country? Or high city-level taxes?

Some landlords don’t mind heavy regulation if it means higher returns. But buying before the backlash means buying without knowing how that heavier regulation will look.

Still, nothing says landlords have to hold onto their properties once the political winds start blowing angrily, right?

Should You Invest in Cities with Growing Wealth Inequality?

Income inequality is a reality of economic growth. The faster a city experiences economic growth, the faster its income inequality should theoretically also grow (barring regulatory intervention).

Why? For one reason, wealth inequality is determined by the upper limit, not the lower limit (which remains more or less a constant in the equation). In other words, income inequality jumps because Peggy doubles her income to $500,000/year, not because Bill’s income drops from $21,000 to $20,000/year.

On a citywide level, let’s use an oversimplified example of a small, post-industrial town with a struggling economy. Not much wealth inequality, right? And not much wealth, either. The richest person in town might be the guy who owns the local bank, earning $100,000/year from his little community bank.

Then someone comes in one day with the idea to convert the old fallow factory buildings to server farms for a new IT startup. They install solar panels on the roofs to power them. They invest money in hiring and bringing in a skilled workforce.

Suddenly, this company starts generating wealth in the town. And that wealth is not evenly distributed.

By its very nature, wealth is created by building companies—building something of value where before there was nothing. These companies create jobs, some of which pay well, some of which don’t. But the owners and shareholders who took a risk to build them are where the real wealth originates and accumulates.

Now the richest person in town is this entrepreneur, who earns $800,000/year. She has employees whose salaries are higher than that poor sap running the local community bank who was previously the wealthiest person in town.

If income inequality is a byproduct of a city’s economic growth (at least until the city council decides to raise taxes and regulation), then that means that wealth inequality is one more economic indicator that can help predict real estate growth.

Most people don’t like the idea of a growing income gap. But that doesn’t mean it can’t be a useful metric for spotting cities poised for faster real estate appreciation.

What do you think about widening income gap as a predictive metric for real estate gains? A useful predictor or just a smokescreen? What about the risk of backlash against high-earners and landlords?

Share your thoughts below!

About Author

Brian Davis

Brian is a remote landlord living overseas and long-time personal finance and real estate expert who co-founded

SparkRental revolves around helping rental investors and landlords earn more and work less: we provide free rental resources such as a rental property calculator, free income investing video courses, and a free online landlord app that includes a free rental application, instant tenant screening reports, a free lease agreement, automated rent collection and more. Come by SparkRental and say hi to Brian, he loves hearing from readers!


  1. Mark alpert

    As your example illustrates, income inequality, by itself, means nothing in terms of investment or even broader economic goals. If Joe’s income of $100,000 goes up by ten percent ($10,000) to $110,000, while Mary’s income of $1,000,000 goes up two percent ($20,000), the income gap is increasing, but it is a great outcome. We should only concern ourselves with whether opportunities are improving across the entire spectrum. Haven’t we seen enough examples of what happens when government tries to equalize incomes? It “succeeds” in making the vast majority of the country poor, while those holding power do just great. (See Venezuela) If we let the market work, a rising tide lifts all boats.

  2. Andrew Syrios

    I think you hit the nail on the head with “If income inequality is a byproduct of a city’s economic growth.” Unfortunately, I think the main way they “remove” that inequality is that the price of living gets so expensive that poorer people simply move out.

    • Brian Davis

      Affordable housing is definitely not an easy problem to solve. One solution is adding more affordable housing supply, but that solution unfortunately gets hit from both sides – many cities (like San Francisco) have extremely onerous zoning requirements, and don’t approve much new housing. And on the homebuilder side, developers much prefer to build luxury homes because the margins are wider. I think we need a common sense approach to zoning, to streamline the approval of new affordable housing.

  3. Our financial regulators including those in government & in banking have a criteria they want to enforce that is:
    ” You can only afford to pay up to 30% of your gross pre-tax income for rent or a home mortgage.”
    So one size fits all ! Any idea as to the impact of this or lack of education, marketable skills or work ethics play into income inequalities?

    Is it not true that socialist/communist countries have more income inequality than the USA with our tax structure? Google this to find out.

    • Brian Davis

      I’m of the opinion that income inequality is not the problem, the problem is the number of people living in poverty. As mentioned in the article, income inequality only really measures the high-income side, and we want to see higher incomes. But we don’t want massive numbers of people living in poverty. So to me, the social justice conversation should center around lifting as many people as possible out of poverty, and improving their quality of life, rather than focusing on what high-earners are making (income inequality).

  4. Income inequality implies there is income equality. It is an odd belief system that America’s affluent reached their status at the expense of the poor and middle class. A free society will naturally have disparities in output due to human desires that create varying levels of productivity. “Income inequality” is a political talking point that has received far too much attention in today’s society.

  5. Dustin Turin

    This post makes me think of that adage they teach in most stats classes about the relationship between ice cream and drowning. That is, there is this widely observable relationship wherein as ice cream consumption increases, so do incidents of drowning — so be careful when eating ice cream!

    The lesson being: correlation does not equal causation! And failing to make that distinguish can lead to some pretty wacky conclusions, like I will argue this one is.

    Does income inequality predict better investment returns? I highly doubt that’s the case. Greater income inequality ultimately leads to a consumer with depressed financial resources and limited ability to spend, thus reducing demand for goods of all types, including expensive housing. There’s only so much housing that a few really rich folks need.

    We know that as economies grow (just like large companies), their rates of return gradually start to decrease. That’s why the U.S. is ‘hot’ at 4% GDP growth while smaller countries might grow at 10% per year or more — to a point, and then eventually those growth rates start to tick down (see China). If we accept the author’s premise that “in advanced economies, income inequality tends to grow over time,” then really we should observe rising income inequality as a signal of shrinking future returns — after all, the fast growth that led to the higher inequality will be hard to maintain.

    So, let’s ask that question again: does higher income inequality predict better investment returns? Or do better investment returns lead to higher inequality? The latter case seems much more plausible!

  6. tim parker

    Nice analysis, but I don’t think you understand the genesis of income inequality. It really goes back to 1971 when the US moved off the gold standard. That decoupled income growth from productivity growth meaning the guy on the factory floor only made 2% more when his output grew by 100%. The extra 98% went to those that own the factory.

    All I know is: more money=higher prices. San Francisco is just rich people renting from richer people. Invest there if you can stomach it. I couldn’t.

    • Darin Anderson

      Really? The gold standard prevents income inequality? I swear that some people think the gold standard prevents cancer too. And how exactly does the gold standard prevent the factory owner from taking 98% of the profits?

      Ever look at the era of the Robber Barons at the turn of the 20th century. We were on the gold standard and that was pre-fed and pre fiat currency. Never has so much money been concentrated in so few hands. The industrial revolution altered the economy in ways that created huge profits and shifted profits of the entire economy almost exclusively to those sectors. The early owners of the industrial revolution in railroards, oil, steel, etc, collected nearly all the profits of the economy unto themselves. (Not unlike some of the big tech companies are doing today, but they are held more broadly than the ownership interests of the Robber Barons which owned entire industries nearly by themselves.)

      Andrew Carnegie
      Cornelius Vanderbilt
      Charles Schwab
      J.P. Morgan
      John D. Rockefeller
      and a couple dozen others.

      There is a reason that more than 100 years later companies, institutions, colleges, symphony halls, etc are still named after these people. They had so much money they built institutions unto themselves.

      The gold standard has nothing to do with preventing income inequality.

  7. David Pizzi

    Great thought piece, but need to point out many of the errors regarding San Francisco. Having lived, bought and landlorded in SF and NYC, I can tell you that income inequality is not as much of a big deal as discussed. Rent control laws have been in effect for ages, and given the boom – just cycles of these cities, many of the people arguing for more controls on rent and landlords aren’t the majority. Social media and headlines tend to tell an alternative tale.

    Regarding housing, there’s been much more supply that’s hit the market in SF and NYC the last 10 years. This is the reason (in part) for rents cooling. Plenty of residential zoning has opened up in SF especially.

    Also, don’t be misled by the headlines too much. Many big companies are hereto stay, expanding current campuses into undeveloped areas outside of the major cities like Pleasanton, Livermore, downtown San Jose, Fremont, Redwood City, Gilroy and…OAKLAND.

    The biggest issue facing these cities isn’t the cost of rent. That’s a side effect of living and playing in a major tier 1 city of the world.

    The most important metric to look at is commercial space pricing. Luckily for SF, Oakland is fast developing its downtown.

    It’s not hard to understand why. This same approach was used for Brooklyn and Queens in NYC.

    Bottomline, regardless of the city, it’s politics, etc, money talks. If developers and landlords (in most cases) help the city maintain its status quo and increase business then there’s little to fear.

    In good times, people in these cities scream from the rooftops about unfair rents, etc. But, in downturns, will they be around to absorb a housing shock like we saw in 2007? Nope, that’s where landlords come in.

    Overall, I do think there’s much to be said about evolving tier 2 cities, but the statistics on labor trends and data still aren’t as strong as if you loved and owned in a tier 1 market.

    My 2 cents

  8. I think that the problem here is that higher median incomes mean that people can afford to spend exponentially more on housing AND that housing pricing is a function not of median income housing but of demand and supply.

    First point — In San Francisco the median income is $78K/year, much higher than the us average. Now excluding housing life including groceries the median household might spend $25K per year (across ALL US households). While the cost of food and groceries MIGHT be higher in SFO than the rest of the country the fact of the matter is that it isn’t by a drastic percentage. The MAJOR difference in cost of living is in only one category – housing. Ok so whg does that mean? It means that if you live in sfo and make $20K more than the average household, and your non housing costs of life are roughly the same as elsewhere in the country, that ALL of that extra $20K can go to housing. It’s the reason why income can be just 30-40% higher than the national average and housing can be 200-300% higher. This compounds when you realize that folks can get by without vehicles in certain places, allowing still greater percentages of income towards housing.

    The second point is all about supply and demand. Suppose you have 100 people who want to live in 10 houses. The price of the houses has NOTHING to do with average income of the 100 people. The ONLY people that impact the pricing of the houses are the 10 wealthiest, assuming all else is equal and everyone is willing to give all they have to buy…

    If rent is $3000 per month, then the family will spend $36k per year on housing. Perhaps leaving them

    • Brian Davis

      Interesting points Scott. Although the first seems to support the notion that higher median incomes causes real estate appreciation, and the second seems to argue the opposite, that incomes do not impact housing values?
      While no one can argue that supply and demand aren’t the primary drivers of any market-based pricing, income does impact demand. In your example, 100 people may WANT to buy those 10 homes, but what if only 50 of them can actually qualify for a loan to buy them?
      Ultimately I don’t think we disagree – these are all cities with high incomes, strong economies, and high desirability, which means demand for housing is enormous, and supply has been slow in coming. A good recipe for strong appreciation.

      • Scott Trench

        Sorry if that came across as me disagreeing Brian – I think that I was not effective in responding with my phone, and will write with my computer from now on.

        BOTH of my points, in my opinion, support the conclusions in your article that rising income inequality increases both rents and property values. I am agreeing with you :).

        The point is that the market is set not by total demand and total supply, but by the capacity of the wealthiest portion of the buyers in the market when supply is limited (as in the case of cities with rising income inequality). If there are 10 houses and 100 buyers, the market is set by the wealthy, not by the average.

        That, AND the fact that cost of living is only slightly higher in expensive housing markets than in inexpensive ones.

        A loaf of bread, peanut butter, and jelly is not significantly more expensive at a grocery store in SFO than in Milwaukee, WI. A median income earner can afford to eat, dress, and clothe themselves in both markets. The difference for them is in one category – housing.

        • Brian Davis

          Haha, no worries Scott. And I’m with you 100% – cost of living between cities is mostly determined by housing (at least within a single country).
          Thanks for the thoughtful comments!

    • Brian Davis

      Hi Alvaro,
      There’s nothing wrong with good-but-small markets. In fact, they can often be the best!
      I’d keep an eye out for mid-size towns up through mid-size cities within an hour of where you live, that have stable, diverse economies not reliant on one single industry. You can always look for partners as well, in new towns.
      Shoot me a PM and I’ll send you some resources to help you get started.

  9. Deanna Opgenort

    Wouldn’t the most useful part of looking at rising inequality be deciding what type of housing to invest in, or deciding what to do with existing housing? All other things being equal, if I owned property north San Jose I would improve it within an inch of its life to attract tenants who have tons of income and value proximity to work. The rents there are already so high that IMHO no one is likely to bat an eyelash at paying $200 a month more for a place with stylish finishes & great lighting (especially if public areas are kept clean clean clean!). In a “more equal” market people balk at $50 more than same size other apts, so Formica & 15 year old kitchen cabinets rule.

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