A prominent economist, Jesús Fernández-Villaverde, has introduced a nuanced perspective on population decline, asserting that it may not lead to a self-correcting fall in housing prices, particularly in what he metaphorically terms "sponge cities." Fernández-Villaverde, the Howard Marks Presidential Professor of Economics at the University of Pennsylvania, specializes in macroeconomics and economic history, often focusing on demographic trends. His recent commentary challenges the common assumption that a shrinking population automatically translates to more affordable housing and a boost in fertility rates.
In a recent social media post, Fernández-Villaverde stated, > "As the population falls, we are observing a phenomenon called sponge cities... There are even more incentives for the population to concentrate in large cities (e.g., Tokyo or Seoul)." He clarifies that his use of "sponge cities" refers not to the urban planning concept for water management, but rather to areas where populations are drawn into larger centers, leaving smaller regions to "shrink" and lose vitality. This phenomenon, he argues, is driven by three critical factors: jobs, services, and amenities.
As populations decline in many regions, job opportunities diminish, even for professions that cannot telecommute, such as plumbers. Concurrently, essential services like grocery stores, hospitals, and schools become unviable and close down, creating a negative spiral for remaining residents. Furthermore, amenities such as bars, theaters, and restaurants also vanish, which Fernández-Villaverde notes are increasingly important to younger demographics. These combined losses create strong incentives for people to migrate to larger, more vibrant urban centers.
Research on urban shrinkage corroborates these points, highlighting that population decline often results from deindustrialization, out-migration, and a subsequent loss of economic base. This leads to reduced demand for housing in shrinking areas, but paradoxically, the concentration of people in major urban hubs can sustain or even inflate housing prices there. The economist concludes that the self-correcting mechanisms often assumed in demographic shifts may not materialize, especially concerning housing affordability and fertility in the face of this urban concentration.