Thursday, September 01, 2011

Fewer children when house prices head north

In a previous article in this column, it was indicated that declining fertility in Singapore may be linked to rising house prices. Can you elaborate on this?
By Tilak Abeysinghe

Despite many incentive packages offered by the Government, Singaporeans just do not want to buck the trend and have more children.

Singapore is not alone. Fast-growing East Asian countries are in the same league, with total fertility rates (TFRs) among the lowest in the world. The TFR measures the average number of children born to a woman over her childbearing years. Last year, five countries and territories with the lowest TFRs in the world were South Korea (1.22), Taiwan (1.15), Singapore (1.15), Hong Kong (1.04) and Macau (0.91). These numbers are well below the replacement level of two children per woman in developed countries.

Economists, sociologist and others have offered many reasons for this declining fertility trend as people get richer. Economists in particular - who are well known for reducing beautiful concepts like childbearing to crude forms like 'demand for children' - have argued that demand for children has dropped because the price of children has gone up. Price of children includes the time cost to a woman. Educated women can command a higher wage and therefore they have to forgo a higher income to attend to a child.

The price of a child increases further when parents want to spend more to 'produce' a 'quality child', educating a child to the fullest possible extent. If the price effect is kept under control, demand for children should go up as household income increases.

Unfortunately, this is not what the data shows. Why fertility (demand for children) falls as income increases, even after controlling for the price effect, has puzzled economists for a long time. If demand for a commodity falls when income increases, such commodities are known as 'inferior goods'.

This reasoning explains only a part of the puzzle. A hypothesis that explains the puzzle much better is the relative income hypothesis. Relative income refers to the ratio of actual income to desired income. Desired income has to be defined in relation to a certain basket of goods. It depends on factors like the standard of living the individual was accustomed to in his/her parental household and the living standard of a reference group.

In this light, I wanted to see how the housing affordability index (HAI) that PhD student Gu Jiaying and I constructed, now presented in detail at the Singapore Centre for Applied and Policy Economics website, is related to TFR.

It was quite surprising to see how closely these two have moved in the past.

We defined HAI as the ratio of household lifetime income at age 30 of the household head to house price. An increase in HAI indicates an improvement in housing affordability. Since a home is the most expensive item in the desired basket of goods, HAI also stands as a measure of relative income.

A positive relationship between TFR and HAI indicates that, holding house price constant, an increase in actual income increases TFR and, holding actual income constant, an increase in house price reduces TFR.

What we observe is that TFR has a close link with the HAI from two years earlier. The chart below plots Singapore's TFR aligned with HAI (lagged by two years). Because of the lack of data on Housing Board prices, we have used the ratio of median lifetime income to average private residential price to construct the HAI. Since HDB resale prices have closely followed private residential prices in the past, the trends of HAI for private and HDB housing are very similar.

It is rather striking to observe how TFR has turned around when the corresponding HAI turned around. Some discordance occurs in dragon years 1988 and 2000 (an auspicious year for babies in the Chinese calendar) and between 2001 and 2005.

When housing affordability drops, fertility appears to also dip. It may be the case that young couples want to secure a roof over their heads before getting married and having children. When housing affordability drops, they will have to wait longer to secure a house and this may come at the expense of family size.

Although the fertility rate is stubbornly less responsive to many factors, it is possible that sustaining housing affordability may help at least in arresting the precipitous decline in the fertility rate.

The writer is the deputy director of the Singapore Centre for Applied and Policy Economics, Department of Economics, National University of Singapore.