TAX MAN: Responsibility for the housing crisis is not what you think

It’s no secret that housing costs are astronomical here in Hawaii (even if you’re not the TMT Observatory). It has been more difficult to determine why this is so, then to try to find solutions.

Lawmakers have often clung to the theory that out-of-state buyers are driving up prices. “Many in Hawai’i cannot compete with outside investors to buy homes and condos beyond their economic reach,” said a 2020 Civil Beat opinion piece written by Brian Schatz, Ron Kouchi, Scott Saiki, Donovan Dela Cruz, Sylvia Luke and Derek Kawakami.

To combat these perceived abuses by outsiders, our legislators have introduced a number of punitive measures. One was the “Vacant Dwelling Tax”, which would impose additional levies on uninhabited property. The state Senate introduced a bill in 2020 to that effect, SB 2216 (2020), which passed the Senate but blocked Loger.

The Honolulu City Council then picked up the slack with Bill 76 (2020), which didn’t go too far either. Other punitive tax measures were enacted, including increases in the state transportation tax for residences that do not qualify for a county property exemption, and increases in county property taxes for such residences ( Honolulu’s “Residential A” tax classification, for example). Even during this year’s legislative session, a bill (SB 2237) was introduced to more than triple the tax rates for residences selling for at least $2 million. It would have imposed a staggering $1 million disposal tax on the sale of a $20 million single-family home if the seller didn’t qualify for a property exemption – and that would be on top of any other taxes like capital gains.

Recently, the Grassroot Institute of Hawai’i released a research report essentially throwing a lot of cold water on the outside buyer theory. The author performed a regression analysis for the period 2008 to 2021 of the average home prices purchased by local residents against the percentage of out-of-state buyers.

The analysis found a statistically significant negative correlation, suggesting home prices for local residents were relatively more expensive during times when there were fewer out-of-state buyers. This is the opposite of what one would expect if the outside buyer theory were correct. The study then looked at more local and national data and concluded, “In short, the popular belief that out-of-state residents are the reason for high house prices in Hawai’i is not than that – a popular belief – but not one supported by the evidence analyzed in this study.

Rather, the study pointed to permit delays and land use regulations as the main culprits. “[M]Most research finds that land use regulations are the main reason for the current situation and the sharp increase in house prices in the most expensive localities in the country,” he said. “Rather than scapegoating out-of-state buyers, Hawaiian policymakers should focus on reducing the number of government regulatory hurdles that restrict the state’s housing supply.”

Coincidentally, the release of this report was soon followed by a revelation from the City and County of Honolulu. As reported by Pacific Business News, as of August 11, 2022, there were 3,499 building permit applications in the initial processing or pre-screening phase; 4,780 permits under review of plans with plan reviewers; and 1,113 permits approved and pending retirement.

That’s 8,000 building permit applications in the processing queue. A 2020 municipal audit (Report No. 20-01) found that the average processing time for a residential construction permit application was 108 days, while a commercial project costing between 1 and 10 million dollars took 432 days.

It’s way overdue, and if you borrow money to do construction, the bank will charge you every day, even if you’re waiting for a permit.

Do we want to solve the problem? So let’s not waste time and energy punishing those who are not responsible!

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Tom Yamachika is president of the Tax Foundation of Hawaii.