Globally, housing markets in urban areas have seen significant increase in prices over the past years. These developments are of relevance for the local population as well as social processes that underline the urban cohabitation. Increasing income inequality can impede social mobility, economic opportunities and lead to rising social segregation. While the effect of rising housing prices and social segregation are commonly subject of interest, the effect of capital income on inequality through the channel of housing prices is less investigated in current research. This paper provides empirical evidence from Sweden that urbanization through the channel of housing markets leads to segregation and inequality. Urbanization causes housing prices to rise disproportionately to income. Consequently, segregation of social strata takes place as well as an overall rise in capital income for those high-income urban residents. Therefore, increasing housing prices extend the inequality in wealth and capital income. The capital income distribution trend in turn leads to rising inequality, as measured by the Gini coefficient. The presented analysis indicates that increasing housing prices may potentially have adverse effects on social equity, even in highly developed welfare state like Sweden.