Academic journal article Economic Inquiry

The Effect of House Price on Fertility: Evidence from Hong Kong

Academic journal article Economic Inquiry

The Effect of House Price on Fertility: Evidence from Hong Kong

Article excerpt


The mechanism underlying the demographic transition coinciding with industrialization still remains an unresolved debate in economics and demography. Early contributions to the New Family Economics formulated the choice of fertility into the Beckerian time allocation model and derived that the secular decline of fertility rates in developed countries over the past 50 yr was mainly attributed to the increase of the opportunity cost of childbearing and rearing, represented by the increase of female education levels, wage rates, and labor force participation rates (Becker 1960, 1991; Willis 1973). Although this negative relationship between fertility rates and female labor market activities has been verified by later empirical studies (Butz and Ward 1979; Heckman and Walker 1989, 1990), "it cannot fully explain the demographic transition pattern in Western Europe and elsewhere," as contended by Becker and Murphy (2000).

An illustration in point of the insufficiency of this female labor market story comes from the demographic transition pattern that has occurred with the East Asian Tigers during the past four decades. While these four economies, South Korea, Taiwan, Hong Kong, and Singapore, have experienced both economic "takeoff" and fertility decrease synchronously (Macunovich 2000), their female labor market behavior changed mildly and female labor force participation rates (FLFPRs) are still much lower than their western counterparts. (1) The typical representation of this new demographic transition pattern happened in Hong Kong. On the one hand, the economy of Hong Kong has been booming and has experienced one of the fastest per capita gross domestic product (GDP) growth rates around the world in the past four decades.

However, the total fertility rate (TFR) has sharply decreased by 75% at the same period, from 3,459 in 1971 downward to 966 in 2005, one of the lowest in the world and far below the required replacement level of 2,100. (2) On the other hand, however, the extent to which the female labor market behavior has responded to the economic prosperity has been very limited. For example, the FLFPRs just increased from 42.8% in 1971 to 52.0% in 2005. (3) Since it is unbelievable that a 9.2% increase of FLFPRs is the primary driving force for the almost 75% decrease of TFRs, other factors influencing the shadow price of childbearing and rearing should also be taken into account. (4)

The dominant factor responsible for the drastic decrease of fertility rates in Hong Kong suggested by the present article is the house price (HP). The justification of the HP into a fertility decrease story involves the standard income and substitution effects. First of all, the increase of HPs impoverishes parents and exerts a negative income effect on the demand for children in the standard economic theory of fertility (Becker 1991). Following the conventional practice in which the child is assumed to be a normal good, the negative income effect decreases the demand for children. Second, HP is a part of the shadow price for children. The increase of the HP should also decrease the demand for children in the Hicksian sense and this negative compensated substitution effect reinforces the pure negative income effect. Overall, both effects may cause many relatively young or poor households to be unable to afford to set up a household in a lifecycle context. Consequently, to the extent that owning house or renting house of a sufficient size may be a precondition for having children, many such households may be highly constrained to have any children at all. For relatively wealthy couples, rising housing prices would diminish the house size they could afford to buy or to rent and decrease the demand for children accordingly.

More importantly, the magnitude of the increase of HP may be large enough to trigger the sharp decrease of fertility rates in Hong Kong. In fact, the growth rates of HPs have dominated the growth rates of both real per capita GDP and real wage rates during the past four decades. …

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