Urbanization, Housing Markets, and Socioeconomic Inequality: Empirical Evidence from Pakistan's Twin Cities of Rawalpindi–Islamabad

Abstract

This paper investigates the relationship between urban densification, housing market dynamics, and socioeconomic inequality in the Rawalpindi–Islamabad (Twin Cities) Capital Territory using union-council-level panel data spanning 2001 to 2023. Exploiting historical master-plan zoning instruments and infrastructure investment shocks—including the Islamabad Metrobus corridor and the China–Pakistan Economic Corridor (CPEC) ring-road investments—as sources of exogenous variation in urban density, this study estimates instrumental variable (IV) regressions alongside difference-in-differences (DID) specifications to isolate causal effects. The central findings are threefold. First, a one-standard-deviation increase in population density raises union-council-level median residential property values by approximately 31.4 percent, a magnitude that persists after controlling for income sorting, educational attainment, and spatial proximity to government-sector employment. Second, rising density increases the Gini coefficient within union councils by 3.8 to 5.2 Gini points on average, driven primarily through the displacement of low-income renters in katchi abadis (informal settlements) and the rapid appreciation of regularized owner-occupied housing. Third, the inequality effects are most pronounced in low-income union councils within five kilometres of Islamabad's Central Business District and Rawalpindi's Saddar commercial hub, where housing cost burdens exceed 40 percent of gross income for households in the bottom income quintile. Robustness checks using alternative inequality measures, spatial-lag corrections, and placebo instrument tests leave the core conclusions intact. The results challenge the prevailing narrative that densification uniformly alleviates housing unaffordability in rapidly urbanizing South Asian economies and suggest instead that, absent redistributive policy interventions and inclusive urban planning, urban growth exacerbates rather than attenuates spatial inequality in Pakistan's premier metropolitan corridor.