Some commentators argue that the new policy is negative for Chinese housing market in the near term. The argument goes like this:
- As some families decide to have a second child, they are going to spend more on nappies, milk, education, etc, and hence we shall see a negative impact of this policy of the savings rate in the near term. And lower savings rate results in lower housing demand.
- Having more children means lower demographic dividend in the short term (demographic dividend is a vague statistical concept, though I assume in this context it is measured by working-age population as a share of total population), which again lowers structural demand for housing.
As mentioned in a previous post, I think the market tends to overestimate the policy effect in the short term and underestimate its effect in the long term, given the challenge of assessing the benefit of something that only takes effect gradually. However, some qualitative judgment could be made and I disagree with the commentators’ argument mentioned at the beginning of this post:
- While it is probably true that the families that decide to have a second child would probably have to reduce their savings rate in the current year, the argument ignores the fact that some of those families may have to purchase a bigger property as their current property cannot accommodate two children. This entails a kind of structural demand that barely existed before the policy change, which lends support to the housing market with excess supply.
- There is an important caveat about the measure of demographic dividend, i.e. working-age population as a share of total population: it fails to differentiate a very young country with a very old one. Some African countries, with a large number of population under 14, has a very similar ratio to that of Japan, with a large number of population over 65. Therefore, a more appropriate measure should be that of working-age population over population above 65, where we can clearly see the demographic vulnerability of Japan relative to that of Africa. (A even more accurate measure of demographic dividend, in my opinion, is the one that takes into account employment.) Under the improved measure, the two-children policy won’t worsen the demographic dividend of China.