Want more housing? Why not just cut the red tape?

from Grassroot Institute of Hawaii June 6, 2023

If an “empty homes” homes tax were to serve no other purpose than bringing in tax revenues to fund affordable housing initiatives, wouldn’t that be worth pursuing? 

Speaking with H. Hawaii Media radio host Johnny Miro on Sunday, Grassroot Institute of Hawaii research associate Jensen Ahokovi answered, “I wouldn’t think so. I don’t think any meaningful change comes from putting more money into the hands of the state — at least when we talk about housing.”

Ahokovi said other goals of an empty homes tax include increasing occupancy rates, increasing housing stock and decreasing prices, but none of those goals would likely be served well, if at all, by the tax either — as explained in a new Grassroot Institute policy brief he co-wrote titled “The ‘empty homes’ theory of Hawaii’s housing crisis.”

Ahokovi told Miro that the problem with increased funding for government affordable housing programs is that it doesn’t address the structural problems in the housing market, namely the strict regulatory environment.

In addition, he said, “the private sector is just much better than the government at providing housing in terms of quality, scale and cost efficiency,” so “why not just cut the red tape instead of reaping more taxpayer money that seems to be ultimately wasted?” 

Ahokovi also talked about the Institute’s report released in August, “The ‘outsider’ theory of Hawaii’s housing crisis,” which he said points out “that the proportion of home sales going to outside buyers has declined over the past decade or so. So, with that in mind, it’s really hard to attribute Hawaii’s rising prices to a declining share of outside buyers.”

Said Miro: “In a sense, I guess the theme of these two reports is that lawmakers kind of need to stop going after scapegoats and instead maybe address the real causes of Hawaii’s housing crisis. Does that sound about right?”

“Correct,” Ahokovi said. “The rhetoric about empty homes and outside buyers can often pull on the heartstrings of voters. But as is often the case, popular policy doesn’t always make good policy.”

TRANSCRIPT

6-4-23 Jensen Ahokovi with Johnny Miro on H. Hawaii Media radio network

Johnny Miro: All right, good morning to you and happy Sunday. I’m Johnny Miro. It’s time once again for the public access programming on our five H. Hawaii Media radio stations — broadcasting on Oahu 101.1 FM, 101.5 FM, 97.1 FM, 107.5 FM and 96.7 FM. 

And once again, we’re gonna be talking about a — well, a very important topic, and it might be misunderstood by many. 

So we’ve been hearing a lot of talk recently about a proposal to tax so-called, quote-unquote empty homes. [The] tax is a way to help resolve Hawaii’s housing crisis. 

All right, and in response, we’ve got the great people at the Grassroot Institute of Hawaii [who] just issued a new policy brief challenging that idea. It’s called, entitled, “The ‘empty homes’ theory of Hawaii’s housing crisis.” 

It says, basically, that so-called empty homes are just another scapegoat to distract attention from the real reason for Hawaii’s housing shortage and high home prices. Now, which, according to the report is excessive regulations that hinder or even prevent homebuilding.

So I have with me, today, one of the co-authors of that report, Jensen Ahokovi, who is a research associate at the Grassroot Institute, and he wrote a new policy brief along with Mark Coleman, the Institute’s managing editor and communications director. So, Mark couldn’t be here with us today. Sorry about that. But in any case, very glad to have Jensen Ahokovi with us this Sunday morning. Jensen, thank you for being here. Good morning to you.

Jensen Ahokovi: Good morning, and thanks for having me on.

Miro: No problem. You folks are great. Always get information that’s solid — and people really appreciate that — from grassrootinstitute.org and the members over there, the team members over there. 

So tell me, Jensen, why did you and Mark write this new policy brief: “The empty homes theory of Hawaii’s housing crisis”?

Ahokovi: Sure. Empty homes are often cited as a major cause of Hawaii’s housing crisis, but outside of the political arena, that theory hasn’t really been carefully examined in the context of Hawaii. 

So Mark and I set out in this report to do exactly that — to sort of shed light on an issue that is often taken for granted as true.

Miro: All right. I understand that this new report is a sequel, in a sense, to a report the Grassroot Institute released last August called “The ‘outsider’ theory” — I remember that well — “of Hawaii’s housing crisis,” which had a big impact on the local conversation about housing policy. Now, what was that all about?

Ahokovi: Yeah, the “outsider” theory [report] was similar to the “empty homes” report, as both reports called into question the so-called conventional wisdom about Hawaii’s housing crisis. 

The “outsider” theory [report] specifically raised skepticism about the popular idea that outside buyers, both mainland and foreign, are the culprits behind Hawaii’s lack of affordable housing and high prices. 

And we found in the report that the proportion of home sales going to outside buyers has declined over the past decade or so. So, with that in mind, it’s really hard to attribute Hawaii’s rising prices to a declining share of outside buyers.

Miro: So, in a sense, I guess the theme of these two reports is that lawmakers kind of need to stop going after scapegoats and instead maybe address the real causes of Hawaii’s housing crisis. Does that sound about right?

Ahokovi: Correct. The rhetoric about empty homes and outside buyers can often pull on the heartstrings of voters. But as is often the case, popular policy doesn’t always make good policy.

Miro: All right. Joining us this morning from Grassroot Institute is a research associate, Jensen Ahokovi. 

And Jensen, beyond the so-called empty homes and so-called outsiders, are there any other scapegoats that you and Mark might be writing about in the future?

Ahokovi: Well, there is a variety of options to choose from — which is great for research, but not so great if we’re trying to fix Hawaii’s housing problems. 

Some of those options could be looking, for example, at the military and the impact of the military presence here on housing availability. 

Another subject that is somewhat similar to the empty homes theory is the idea of short-term rentals and their impact on the local housing market. 

And then I guess we could also consider ideas such as greedy developers who refuse to develop because they’re only looking for profit. That’s another popular idea out there that is prevalent among so-called NIMBYs, which is short for “not in my backyard.” 

But, really, everything’s on the table.

Miro: All right, people are probably wondering, so just to be clear: What do you guys at the Grassroot Institute overall believe is the real cause of Hawaii’s housing crisis then, and what evidence do you have to back up that belief?

Ahokovi: Well, to understand the real cause of Hawaii’s housing crisis, you really only need to boil it down to basic economics. Hawaii’s housing supply is highly restricted, which causes prices to surge whenever there are increases in demand, unless the housing supply can expand to match that demand. 

And so that begs the question: Why is it exactly that Hawaii’s housing supply is so constrained? 

And the answer to that question is that Hawaii has the most restrictive housing regulation in the nation. Each layer of additional regulation increases the cost of building, and that inevitably drives up local housing prices. 

And this is true in theory, and also in the vast majority of economic research that has been done examining the effects of housing regulation on housing prices.

So for example, a comprehensive study that was authored by economist Joe Gyourko and Jacob Krimmel a few years back measured how much housing regulation increases housing prices in America’s metropolitan areas. 

And this concept is known as the zoning tax, and it’s a very simple concept to understand. 

The zoning tax is essentially the difference between the housing price and the cost of land and the cost of construction. So theoretically speaking, the cost of housing should equal whatever the cost of construction is and the cost of land, and any leftover amount should be the cost of regulation.

And they found that in the most regulated areas in the country, regulation accounted for a very substantial fraction of the housing prices in those areas. 

For example, in LA, regulation adds on about $200,000 to the housing price; in New York and San Francisco, it’s almost half a million dollars; in Seattle, it’s about $300,000; and I could go on and on, but I think you get the point. Regulation is the real root cause of Hawaii’s housing crisis.

And another way to think about it is: If there wasn’t as much regulation, then any increase in demand from outside buyers or other external forces wouldn’t actually lead to meaningfully higher prices, and that’s because the housing supply would be able to balance out that increase in demand.

Miro: Great explanation. Jensen Ahokovi with us this morning. 

So about the empty homes report, specifically, what is an empty home, quote-unquote, anyway, and how would an empty home’s tax work?

Ahokovi: Yeah, so the definition is actually really ambiguous. And you wouldn’t think that would be the case because, after all, an empty home should be, you know, an empty home. But at least from the legal perspective, a lot of places define a empty home differently. 

So, in France, for example, a vacant unit is legally defined as one that is unoccupied for at least a year. In Oakland, California, a vacant unit is any unit that is used less than 50 days out of the year. In Washington, D.C., a vacant unit is any unit that is unoccupied for 30 days or more. 

And in Honolulu’s Bill 9, which has been in the news recently — which is Hawaii’s own conception of a vacancy tax — and in Vancouver, Canada, which currently has a vacancy tax, those pieces of legislation define a vacant unit to be any unit that is unoccupied for more than six months. 

So clearly, the definition is very unclear across the United States and even across the world.

Now, as far as how an empty homes tax would work, it’s actually theoretically very simple. And that is: An empty homes tax exploits the concept of economic incentives. 

And it’s this idea that, you know, if you have a property owner, the property owner plays a game of cost and benefits, right? They weigh the cost and benefits of certain decisions. And the reason why a property owner keeps a property vacant is because they simply find the benefits of keeping a property vacant to be greater than the cost.

And we can understand that, especially in Hawaii, because a property owner might choose to keep a unit vacant because it might be their vacation home or they might be using it as a real estate investment to accrue a greater and greater value, which then they can sell off in the future. 

And so what a vacancy tax does is that it wants to complicate that cost-benefit balance. It wants to alter the cost so that the property owner is now encouraged to sell or rent out their unit on the market. 

And to the proponents of a vacancy tax, they think that this is a good solution or a good remedy for the housing crisis because that would supposedly increase the availability of homes on the market.

Miro: Does the vacant lot, that kind of a tax, or is that totally different as far as people holding on to something that’s empty, not being utilized?

Ahokovi: Sure, yeah. It is similar in that both properties are vacant. However, I guess the idea of a vacant homes tax is a little more pervasive in the sense that we’re actually talking about physical property here that people are owning. And this can go down a very slippery slope. 

You know, some people have brought up the idea that, you know, why not stop at a vacant homes tax? What’s stopping the government from talking about a vacant room tax, right? After all, people with big houses could have vacant rooms. Why not charge people for keeping these rooms vacant because somebody could be living in these rooms? 

So you can really see how the logic can apply to not only vacant lots, but also vacant homes and, below that, vacant rooms.

Miro: Yeah, exactly. All right, Jensen Ahokovi, the research associate with the Grassroot Institute of Hawai — it’s grassrootinstitute.org for this paper and others. 

I noticed that the subtitle of the empty homes report is “A tax on empty homes might increase rental occupancies and generate tax revenues, but there’s no evidence really showing it would increase the state’s housing supply or reduce housing or rental prices.” 

So you’re saying, Jensen, maybe an empty homes tax might not be a total loser?

Ahokovi: Correct. And that’s because it depends on what the goals of the tax are. So if lawmakers want to improve affordability or increase supply, that probably won’t happen to any meaningful degree. But if they want to reduce vacancies and earn some extra money, that could possibly happen.

Miro: OK. What’s the evidence, though, an empty homes tax could reduce home vacancies? And then if it would reduce home vacancies, wouldn’t that equate to an increase in the supply of housing?

Ahokovi: Well, I guess it makes sense that a vacancy tax would reduce vacancies to some degree, because as I mentioned earlier, it alters the incentives of vacant property owners, and people often respond to the incentives that are handed to them. But in terms of actual research, the literature is quite scarce. 

So to my knowledge, there is one study in a peer reviewed journal out of France that was published recently that found that France’s national vacancy tax had a significant impact on vacancies. But other than that, there is still a lot of work to be done in that area.

But to your second point, a reduction in vacancies is not necessarily an increase in the supply of housing. And the way you, people should think about it is: Even if every vacant unit in Hawaii was converted into an occupied unit, that doesn’t actually change the total housing stock. And that’s because the housing stock, as it is typically defined, is the sum of both vacant and occupied units. 

So if vacancies are converted into occupancies, all we’re really doing is changing what we’re calling these units. We’re not actually adding any new units that would increase the total housing stock.

Miro: Exactly. All right. One of the only real achievements of such a tax is to generate revenue. Couldn’t we deem that a success if those funds were channeled into affordable housing projects?

Ahokovi: You know, I wouldn’t say so, and that’s because I don’t think any meaningful change comes from putting more money into the hands of the state, at least when we talk about housing. And I think there are two primary reasons for this, although there could be a number of others.

The first is that increasing funding for affordable housing doesn’t actually address the structural problems in the housing market, namely the strict regulatory environment that I alluded to previously. 

And secondly, it’s been well understood that the private sector is just much better than the government at providing housing in terms of quality, scale and cost efficiency. 

So to me, it’s pretty obvious: Why not just cut the red tape instead of reaping more taxpayer money that seems to be ultimately wasted?

Miro: All right. So what could be some of the — maybe you covered it — but some of the unintended consequences of an empty homes tax?

Ahokovi: I can think of a few. And from a legal perspective, a vacancy tax seems to infringe on an individual’s right to use, control and dispose of their property as they see fit. But admittedly, I’m not a legal scholar, and there are probably better qualified people to talk about the legal drawbacks. 

But economically speaking, a vacancy tax might discourage investment, which would put a drag not only on the housing market but also the overall economy. And a vacancy tax might also inadvertently decrease affordability if landlords with vacant properties choose to pass on the tax burden to tenants. 

There are a number of other problems that could potentially arise, but those are the main ones that come to mind.

Miro: OK. So again, if a vacancy tax won’t help lower housing prices or increase housing supply, what would you recommend instead?

Ahokovi: Well, the most straightforward way would be to just reduce the number of regulations that restrict homebuilding. 

I was recently on the Rick Hamada show with Joe Kent, the Grassroot Institute executive vice president, and I think he put it really, he put it in a really understandable way. 

And Joe said, “You know, the lawmakers could essentially close their eyes and just take a pair of scissors and just blindly snip away, and that would actually be a really good way to remedy Hawaii’s housing crisis.”

So for example, if we’re looking at specific solutions, a very simple solution would be to just get rid of single-family zoning laws. And these are a type of regulation that basically only allows a single home on a plot of land. 

Now, if you instead allowed multiple homes on a single plot, you could end up doubling or quadrupling the existing housing supply. 

Recently, Auckland, New Zealand, eliminated single-family zoning in 75% of the city, and that doubled the rate of construction and immediately caused prices to fall in the city’s densest areas. 

Now if you look on Oahu, for example, there’s a really innovative website called the Zoning Atlas — I think it’s the hawaiizoningatlas.com or something like that — and you can actually look at a map of Oahu and look at the areas that are zoned for housing, and then you can add a sub-filter and look at the areas that are zoned only for more than two units per lot. 

And you can see that the vast majority of the area that is allowing housing is only allowing single-family homes, and a very small fraction of that area is allowing multiple properties on a single lot. So that, to me, is a very straightforward [way] to resolve the housing shortage and high prices here. 

But just, again, generally speaking, the best course of action would be for lawmakers to reduce regulations and make it easier for home building.

Miro: Well, this is the second policy brief and, you know, trying to address the housing crisis with new thinking, the empty homes theory, the pushback against that. 

Have you brought this forward to any policymakers now that the legislative session is over? Are you having anybody take a look at this, and have you had people positively react to it?

Ahokovi: I think right now I’m unsure of the specific policymakers that have received our work. But what I can say is that we do do our best to interact with policymakers across the political aisle to try and, I would say, reduce the prevalence of these scapegoats. 

You mentioned it earlier in the interview that our outside buyer report last year did make a big impact in terms of not necessarily eliminating the outsider theory of Hawaii’s housing crisis, but definitely raising the question of its validity.

And I think right now, you know, it’s probably a little too early to tell, you know, what the impact of the empty homes report will be in the policy sphere. But I will say, I’m fairly optimistic that we’ll see similar results to our previous brief.

Miro: I believe the Star-Advertiser ran with that, right? Gave you guys …

Ahokovi: Oh, right.

Miro: Hopefully they picked this one up. Wrapping it up here, Jensen Ahokovi from the Grassroot Institute of Hawaii, you’ve explained a lot. Did we miss anything? Anything else to touch on before we say aloha?

Ahokovi: I guess the last thing I would say would just be, you know, to give the report a read and feel free to channel any of your thoughts of the report to info@grassrootinstitute.org.

Miro: Really appreciate you chiming in this morning with all the great work from the people at Grassroot Institute of Hawaii, Jensen Ahokovi, letting people know about this empty homes theory and that they can pick it up at grassrootinstitute.org. Have a great Sunday. We’ll talk to you soon, OK?

Ahokovi: You too, thanks.