Housing Demand & Affordability for Low-Wage Households: Evidence from Minimum Wage Changes

Abstract

Rent-to-income ratios have risen over the past two decades with large increases at the bottom of the income distribution, prompting concern about a housing affordability crisis. This paper uses minimum wage changes as a natural experiment to study the relationship between housing demand & policies affecting low-wage households. If their housing demand is relatively inelastic, an increase in income will causally decrease rent-to-income ratios. The results suggest a 10% increase in minimum wages increases income for affected households by 1.9%, increases housing consumption by 0.5%, and decreases rent-to-income ratios by 1.4%. These estimates suggest that housing demand is fairly income inelastic, and preferences over housing demand are non-homothetic. In a modeling exercise, this paper suggests that homothetic models may not match housing demand behavior and may underestimate welfare gains to low-wage households.