Less affordable housing = Fewer babies?

An Institute of Policy Studies (IPS) report released this week painted a grim picture of Singapore’s population shrinking in 24 years if the country closes its doors to immigrants.

This is because of Singapore’s total fertility rate (TFR), which is one of the lowest in the world. Despite incentives to boost population growth, the TFR slumped to a historic low of 1.15 last year.

With a shrinking population, there will be less working-age residents supporting the elderly. Last year, 8.2 working-age residents supported one elderly person. The ratio is expected to fall to 1.7 by 2050. A shrinking population – and work force – will also affect economic growth.

I will leave the debate on whether slower economic growth is in itself necessarily a bad thing to the sociologists and policymakers.

I am more interested in the impact of housing affordability on our fertility rate because the IPS study reminded me of comments by a National University of Singapore don last week on an article which contained observations linking housing affordability to fertility rates. The article was based on a study now presented in detail at the Singapore Centre for Applied and Policy Economics website.

According to Dr Tilak Abeysinghe, economists have long argued that the “demand” for children has dropped because the “price” of children has gone up. The “price” of children includes the time cost to a woman. 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.

To the economist, if demand for a commodity falls when income increases, such commodities are known as “inferior goods”. Many of us would readily disagree that children are inferior goods.

Dr Tilak feels the puzzle is better explained by 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. Since a home is the most expensive item, it figures prominently in the measure of relative income.

Adopting the relative income hypothesis, Dr Tilak constructed an affordability index and compared it to trends in our fertility rates.

He observed a close link between the TFR and his affordability index. The TFR turned around when the corresponding affordability index turned around. When housing affordability dropped, fertility also appeared to dip.

While some may find it difficult to accept that our fertility rate will rise if housing affordability improves, many of us can relate to the observation that when housing affordability worsens, our fertility rate drops.

While the IPS report caught the headlines and will probably be hotly debated in the coming days, Dr Tilak’s study drew smaller coverage and even less debate. This is a pity because if his study is spot on, the consequences of today’s high property prices will show up in further reduced TFRs in the future.

I am not sure if our officials have contacted Dr Tilak about his housing affordability study but it definitely deserves more attention and even more debate. His study warrants urgent attention as nobody today knows when the present sustained period of high property prices will end.

Even as more stock analysts and market watchers are jumping on the bandwagon and predicting a recession soon, I am not even sure if our property prices will correct when it happens. It depends on how the severe the recession will be and whether many jobs will be lost.

While I agree with the negative overall prognosis, I am at odds with others as to the timing of the impact. We cannot assume that it is just around the corner as the world has never experienced such a complex economic environment before. And after all, there was a lag of about a year during the Asian financial turmoil and the United States sub-prime crisis before Singapore was hit.

What if the US Federal Reserve launches a third round of quantitative easing – as many are predicting? Will that delay the impact further? In the meantime, how much more damage will be done to our TFR?

By Colin Tan – head of research and consultancy at Chesterton Suntec International.

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