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.
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:
- San Francisco: The gap grew by $142,300 (size of 2015 gap: $492,00)
- San Jose: The gap grew by $122,100 (size of 2015 gap: $468,600)
- Grand Rapids: The gap grew by $99,300 (size of 2015 gap: $282,800)
- Austin: The gap grew by $97,100 (size of 2015 gap: $357,900)
- Des Moines: The gap grew by $90,500 (size of 2015 gap: $293,800)
- Seattle: the gap grew by $85,200 (size of 2015 gap: $344,600)
- Bridgeport: The gap grew by $81,300 (size of 2015 gap: $691,700)
- Charleston: The gap grew by $80,100 (size of 2015 gap: $302,800)
- Denver: The gap grew by $80,000 (size of 2015 gap: $347,100)
- 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…