Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / How Falling Birth Rates Reshape the Housing Market
Transcript
- Lucas: You hear a lot about how falling birth rates mean fewer people, which should mean less demand for housing. Less demand, lower prices, right? Intuitive but Japan's been the test case for that theory over the past three decades, and the reality is much more complicated. Luna: I've seen some of those headlines — Japan's population has been shrinking since 2008, yet Tokyo real estate is still expensive. What's the disconnect? Lucas: Well, the key variable is household formation, not just raw population. Japan's population peaked at around 128 million in 2008, but the number of households kept growing for another decade after that. Why? Because households got smaller. More people living alone, more elderly widows and widowers staying in their homes, younger people delaying marriage. Luna: So you're saying even if there are fewer people, you might need more housing units because each unit has fewer people in it. Lucas: Exactly. And this is the part that a lot of investors miss. In Japan, average household size dropped from about 2.7 people in 1990 to around 2.2 today. That tiny shift — half a person per household — adds up to millions of extra housing units needed just to accommodate the same number of people. The result? Total housing demand hasn't fallen nearly as much as the population numbers would suggest. Luna: That's a huge insight. And it's not just Japan — the US is seeing a similar trend, right? More people living alone, especially among older adults. Lucas: Absolutely. The US household size has been declining for decades. In 1960, the average was 3.3 people. By 2023, it was down to 2.5. Now, the US population is still growing slowly, so the effect isn't as dramatic as Japan's, but it's there. Every tenth of a person decline in household size adds about 1.2 million households, all else equal. That's a lot of demand for housing starts. Luna: And that's before you even get to the silver downsizers — the older homeowners who stay put instead of selling. Lucas: Right. That's the second big demographic effect on housing. In many countries, the share of people over 65 who own their home is actually higher than for younger age groups. And they're staying in those homes longer. In the US, the average tenure for homeowners over 65 is now over 20 years, compared to about 10 years for younger homeowners. That means fewer existing homes come on the market, which constrains supply for younger buyers. Luna: So you've got this double effect: smaller households increase demand for units, and aging homeowners reduce the supply of existing homes. That's a recipe for higher prices, not lower, even with a shrinking population. Lucas: That's exactly what we're seeing in Japan. Outside of a few depopulating rural areas, housing prices in Tokyo and other major cities have been remarkably resilient. And in the US, this demographic tailwind for housing demand is one reason why even a recession might not crash the market the way it did in 2008. Luna: I want to dig into the numbers a bit more. Can you give us a concrete example from Japan? Like, how many extra housing units are we talking about because of smaller households? Lucas: Sure. Between 2008 and 2020, Japan's population dropped by about 1.5 million people. If household size had stayed constant at 2.2, you'd expect housing demand to fall by roughly 680,000 units. But because household size kept declining — to about 2.1 by 2020 — the number of households actually increased by about 1.1 million. So instead of a glut, Japan needed more housing. Luna: That's a swing of nearly 1.8 million units relative to the naive forecast. No wonder developers kept building. Lucas: And this is one of those things that, if it was worth a coffee to you, you might want to remember next time someone says population decline means a housing crash. We keep this show ad-free and listener-supported, and if today's angle made something click, you can find us at buy me a coffee dot com slash fexingo. No pressure, but it helps us keep digging into these data points. Luna: Yeah, it's a small way to say this kind of deep dive matters. And we really do appreciate it. Lucas: So back to the mechanism. The big question for investors and policymakers is whether this trend continues. In Japan, household size is still falling, but the pace has slowed. It's now around 2.1, and some demographers think it could stabilize around 2.0 by 2040. That would still generate additional demand, but at a lower rate. Luna: What about the US? Are we likely to see a similar stabilization, or could household size keep falling? Lucas: The US is in a different phase. We still have a younger population, but the share of single-person households has been rising steadily. In 1970, about 17 percent of households were single-person. By 2022, it was 29 percent. That trend is driven by delayed marriage, higher divorce rates, and an aging population where one spouse outlives the other. I think we'll continue to see household size decline, maybe to 2.3 or 2.4 by 2035. Luna: So that means more housing demand than the raw population numbers would imply. But what about the supply side? Builders have been constrained by labor shortages and higher material costs. Lucas: That's the other half of the equation. Even if demographic demand is strong, if builders can't deliver, you get price pressure. In the US, we're underbuilding relative to household formation by about 1 to 2 million units, according to Freddie Mac estimates. That's partly because of zoning restrictions, especially in coastal cities, and partly because of construction costs. For example, lumber prices spiked during the pandemic and have stayed elevated. So the demographic tailwind is real, but it's competing with structural supply constraints. Luna: Let's talk about the silver downsizers again. You mentioned they're staying put. Is that purely a lifestyle choice, or are there economic factors? Lucas: Both. Many older homeowners have low mortgage rates locked in from before the rate hikes — in the US, the average mortgage rate for existing homeowners is around 3.5 percent. Selling now would mean buying a new home at 6 or 7 percent, which is a huge monthly payment increase. That's a financial lock-in effect. And then there's the emotional attachment to the family home, or the lack of suitable downsizing options. Many suburbs don't have enough smaller, accessible units for older adults. Luna: So the starter home market gets squeezed from both ends: young buyers competing for a limited supply, and older owners not selling their larger homes. That's a structural issue. Lucas: Exactly. And it's one reason why the US has seen such a dramatic decline in housing affordability for first-time buyers. In 2023, the share of first-time buyers dropped to 26 percent, the lowest in decades. Normally it's around 38 percent. Demographics are a big part of that story. Luna: What about the flip side? Are there any markets where population decline is clearly hurting housing demand? Rural Japan, maybe? Lucas: Yes, and it's stark. In rural Japan, entire towns are depopulating. There's a phenomenon called 'akiya' — abandoned homes. As of 2023, there were over 9 million vacant homes in Japan, about 14 percent of all housing stock. In some rural areas, you can buy a house for a few thousand dollars. But even there, the pattern isn't uniform. The homes that are abandoned are often in less desirable locations, while housing in central Tokyo remains expensive. Luna: So geography matters enormously. The demographic effect on housing is highly localized. Lucas: That's the key takeaway for any investor or policy analyst. Aggregate numbers can be misleading. You need to look at household formation trends, age structure, and migration patterns at the metro level. For example, in the US, Sun Belt cities like Austin and Nashville are seeing strong population growth from domestic migration, while parts of the Rust Belt and rural Midwest are experiencing population decline. The housing demand story is very different in each. Luna: And on the policy side, what can be done? Are there examples of governments successfully addressing the housing mismatch from aging? Lucas: Japan has experimented with tax incentives for older homeowners to downsize, but the impact has been modest. One promising approach is what some cities in Denmark and the Netherlands are doing: building 'co-housing' communities for older adults that offer smaller, accessible units with shared common spaces. These developments free up family-sized homes for younger households. But it's still niche. Luna: So the problem is that we have a housing stock built for a demographic that no longer exists. We need more small units, more accessible units, and more flexible zoning. Lucas: Right. And that takes time. The typical development cycle for a new housing project is 5 to 7 years in many cities. So the demographic shifts we're seeing now will affect housing markets for decades. For listeners who are thinking about buying a home or investing in real estate, the most useful lens is to ask: what does household formation look like in this area? Are people moving in? Are they forming new households? Or are households shrinking? Luna: That is a much smarter question than 'how many people are there?' I think that's the core insight of this whole episode. Lucas: It really is. Population size is a headline number. But household formation is the mechanism that actually drives housing demand. And as birth rates fall and populations age, that mechanism becomes more important, not less. So next time you hear someone predict a housing crash because of low birth rates, you can ask them: what's happening to household size? Luna: And if they don't have an answer, you know they haven't done the homework. Lucas: Exactly. For The Demographics Podcast, I'm Lucas. Luna: And I'm Luna. Thanks for digging into the data with us.