House prices and fertility rates: Empirical evidence on the wealth effect and the option value effect in Sweden

Abstract: Previous literature suggests that fertility rates of house owners respond more positively to higher house prices than those of renters due to a housing wealth effect. The identification of such wealth effect relies on the assumption that house owners and renters respond equally to higher house prices as the investment cost of having an additional child. We add to this literature by recognizing that house ownership correlates positively with age. When house prices are high, there is an incentive to postpone fertility to wait and see if house prices will decrease. Option value theory predicts that the value of holding such option to postpone childbearing should decrease with age due to increased risks of fertility postponement, and thus that fertility rates of older women should respond more positively to higher house prices than those of younger women. We empirically test this prediction and the wealth effect by exploiting the regulated rental market in Sweden, allowing us to identify house prices as an investment cost of having an additional child. We use panel data on Swedish municipalities over the years 1993-2014 and fixed effects regressions, and address endogeneity concerns by using internal instruments for house prices and by controlling for various trends. Consistent with the option value effect, our results suggest that higher house prices are significantly associated with positive fertility rate effects for older women relative to younger. Our results give weaker support to the wealth effect, suggesting it is biased when an option value effect is not controlled for.