China's birth rate is plunging, as soaring home prices shatter the dreams of young people of buying a home and raising a family.

China has a severe birth rate problem. In 2020, the country's rate stood at 8.52 per 1,000 people, down from 10.41 in 2019, according to statistics from China Statistical Yearbook 2021, reported recently by Caixin. That's the first time China's birth rate dipped below 10 since 1978.

The continuing drop in China's birth rate may be a big surprise to China observers, as it comes five years after its leadership relaxed the old one-child policy, allowing families to have more children.

Apparently, the policy isn't working, and there's a good reason for it: The property bubble, which has pushed home prices to the stratosphere. It's making landlords rich, while it kills the dreams of the younger generations of purchasing a home, getting married, and having children. For instance, in December 2018, the average price of new homes in China's 70 biggest cities soared 9.7%, following a 9.3% jump in November, the 44th straight monthly gain.

While the decision to get married and have children depends on several factors, it's undoubtedly one of the dominant factors behind the plummeting of marriage rates by close to 30% in the last five years.

Paradoxically, China's soaring home prices is one of the consequences of government policies that promote the development of "ghost cities." These are cities of newly-built vacant apartments held by affluent landlords with the expectation to sell them at higher prices in the future, which becomes a self-fulfilling strategy. Keeping apartments off the market leads to housing shortages, which pushes the prices of second-hand apartments higher. For example, Shanghai's Second-Hand House Price Index rose more than four fold in the last two decades.

China's central bank has urged banks to steady the housing market and stressed that 'houses are for living, not speculation' China's central bank has urged banks to steady the housing market and stressed that 'houses are for living, not speculation' Photo: AFP / Noel Celis

In short, soaring home prices isn't an accident; it results from well-crafted government policies that benefit the affluent class of landlords at the expense of the ordinary citizen class; it contrasts and contradicts the government's policies to forestall the plunging birth rates.

Meanwhile, China's low birth rate problem could turn out to be the Achilles' heel of its economy, pushing it to prolonged stagnation. At least that's the experience of neighborhood Japan in the 1980s. Then, a property bubble in the 1980s coupled with declining birth rates and growing competition from emerging market economies pushed the country into a prolonged stagnation lasting to this day, which exacerbated the country's low birth problem.

But China's problem could be far worst. The plunge in birth rates is expected to translate to a decreasing labor force when the country faces growing competition from labor-abundant nations like Vietnam, Sri Lanka, the Philippines, Pakistan and Bangladesh.

Meanwhile, low birth rates have already put pressure on the country's social security system due to unfavorable "dependency rates" -- too few workers support too many retirees. This situation is expected to get worst as the population pyramid becomes more skewed towards the older ages.

We'll know where these unfavorable dependency rates lead: piling government deficits as governments try to make up for the shortfall in the social security funds. Government deficits, in turn, add to the national debt, as governments issue bonds to pay for social security expenses.

Over three lost decades, Japan encountered all these problems, mired in stagnation and floundering in the swamp of rising debt. China could experience many more unless it deals with the root cause behind the declining birth rates: The high property values, which involve tough leadership choices.