Why Hawaii's housing costs are among the highest in the nation

by Ted Kefalas, Grassroot Institute

The following commentary was first published on Dec. 2, 2024, under the headline “How Hawaii’s regulations drive sky-high housing prices” by American Habits, a non-partisan online publication.

Ted Kefalas is director of strategic campaigns at the Grassroot Institute of Hawaii. Prior to joining the Grassroot Institute of Hawaii, he worked as a government affairs and crisis communications professional with Capital Results in Richmond, Virginia, representing clients in diverse industries nationwide. Kefalas is a graduate of the University of Virginia and was a member of the Cavalier football team. He recently spoke with American Habits editor Ray Nothstine about solutions to the high cost of housing in Hawaii.

Ray Nothstine: Most people understand the basics of the cost of housing in Hawaii — there is limited land in a highly desirable location. On top of that, because of the island environment and how isolated you are, you have an extremely high cost of living. If somebody is not familiar with Hawaii, is there anything they should know or that might surprise them about the cost of housing?

Kefalas: Where do I even begin, Ray? Hawaii’s housing market is a convoluted web that takes a lot to untangle. We could spend this whole time just talking about all the intricacies of the current climate, but I’ll start by saying that home prices in Hawaii are among the highest in the country. Two common explanations for this are the high costs of land and construction.

First, land in Hawaii is incredibly expensive, and part of that’s because we’re on an island and we can’t keep extending our suburbs like Los Angeles or New York, or else you’d end up with homes in the Pacific Ocean. More importantly, a significant part of the state is zoned as agricultural or conservation. State land use laws significantly restrict urban development, meaning neighborhoods or condos can only make up about 5 percent of the state.

Of the 5 percent that’s urban zoned, not all of it can be used for housing. For example, on those urban lands, shopping centers are generally restricted to areas that are zoned for businesses. You have homes that are generally in residential areas. Within those areas, there can be further restrictions on what types of stores and homes can be built, whether that’s lot size, height, or setback restrictions.

This artificial restriction really limits the availability of land for residential development, which intensifies competition and drives up prices. That’s one of the many reasons that homes that were built here in Hawaii were built in the ’60s and the ’70s. Back then it was much easier to build, whereas today we aren’t building enough to keep up with demand.

And here comes the government again to save the day. The government has deemed any Hawaii property that’s at least 50 years old to qualify for a historic review. That becomes an added difficulty to redeveloping older homes.

While there is some development happening, I also want to highlight the second point that I talked about. Nearly all construction materials are imported, which raises building costs since we must pay an additional tax on all imported goods. This is true for things like lumber, concrete, and even light fixtures. A lot of these things you can go and get locally on the mainland.

The University of Hawaii researched the cost of housing and found that the state has both the highest land costs and the highest construction costs of any state in the country. Shipping merchandise from the West Coast to Hawaii can sometimes cost 300 percent more than shipping that same cargo all the way to Australia. That alone didn’t drive up the prices so much to the point where we’re at today.

The research added a third cost that a lot of folks don’t consider, and that’s supply restrictions due to government overregulation. High housing prices are typically a strong incentive for developers to build more homes, but the regulatory barriers prevent the market from really acting. It’s been well-documented that we have the most restrictive housing regulations in the country.

We have six layers of housing regulation. There’s the state land use commission, the island plans, the community plans, county zoning, the historical district, and then the special management area. That’s a lot of layers to get through for somebody to just build a house. On average, we’ve seen that it takes about 10 years — and sometimes even longer — for builders to turn a raw piece of land into a home.

As a result of all these restrictions, people aren’t building, and that’s lowering the supply and driving up prices. While the land and construction costs play a role, it’s the regulatory costs that have been estimated to make up about half of the market price of a condo.

Nothstine: You must be innovative for solutions in your organization given the limited amount of land. What is the best way to increase housing supply when you do have such a limited allotment of land that can be built on?

Kefalas: When it comes to housing, you have a couple of different options. You can either build out, up, or in. Building out, that’s essentially your typical expansion of housing in the suburbs or rural areas. Building up helps conserve land by constructing taller buildings and high rises. Tall buildings, quite honestly, tend to scare a lot of people; it gets the not-in-my-backyard crowd riled up.

Then we’re left with building in. That’s utilizing vacant underused spaces, trying to preserve the open land, but also adding density in the areas that are developed. This past year, we looked at different ways to increase supply and found that our best bet was building in.

Because of Hawaii’s high home prices, you have a lot of families that live with multiple generations in one house. We thought, wouldn’t it be nice if you could build a couple of accessory-dwelling units in your backyard so that grandma and the kids have their own space? You also must think a lot of these accessory-dwelling-unit type homes are typically smaller and more affordable for local families, more affordable than a single-family home on a large plot of land. We helped introduce Senate Bill 3202 last year to address this ADU issue, while also making it legal to turn your home into a duplex or a triplex. It only has an incremental effect on our neighborhoods, but we’re hoping that it can provide a monumental change to our housing shortage.

The hope is that providing one or two extra homes in a neighborhood per unit really will help drive up the numbers. We weren’t done there, though. After the incredibly restrictive COVID lockdowns, downtown areas in Honolulu and throughout Hawaii looked like ghost towns. You had local retailers that were replaced by online shops, and many businesses allowed employees to stay remote. I know that’s not unique to Hawaii, but it was exacerbated here.

We talked with a couple of developers who were trying to convert these vacant spaces into apartments — something that just makes basic sense — but they were running into roadblocks with the permitting department. In Hawaii, every room is required to have a window. That would have made these adaptive reuse projects impossible to pencil out or complete. We helped introduce a bill that made it easier to build without needing a window in every room, something not included in the International Building Code. I don’t know why Hawaii requires them — big government gets in the way of the little guy.

In the future, we want to look for more ways to promote the right development. All a developer must do to move forward is make sure their project lines up with the different standards outlined by the county. It gives people a little bit more certainty when it comes to their projects. One of the things we continuously hear from developers is that they just can’t wait to go through all the bureaucratic hoops.

I mentioned earlier that a lot of projects take at least 10 years to get from raw land to a building. That’s not feasible for most people; those kinds of delays can ultimately bankrupt the project. We just want to make it easier for people to provide the housing that we desperately need.

Nothstine: I’m not a big fan of celebrities, but we read or see, especially on the Big Island, celebrities buying up land — Oprah, Jay Z, Mark Zuckerberg, and others. And wealthy mainlanders who want to move to paradise buy houses in Hawaii. Are they the ones that are causing home prices to jump and skyrocket? Should we blame them more?

Kefalas: I’ll start by pointing out that when you look at San Francisco and New York, they have high wages to match their high cost of living, but here we don’t have that. A lot of people who work in Hawaii’s critical industries are in tourism or health care, and they find it challenging to afford a home.

I think that leads to different myths and misconceptions from locals who are frustrated with the current situation. People will say that outsiders from foreign countries, or the mainland, or celebrities, are coming in and swooping up all the homes in Hawaii. That’s the main reason that we have these sky-high prices, right? No, we found that outside buyers aren’t the main reason for Hawaii’s home prices.

I do want to throw in a little caveat. It’s true that outside parties do buy up a fair number of homes here. We did a study a few years ago: about 22 percent of the homes in Hawaii were bought up by folks from the mainland, and another 2 percent were bought up from foreign countries — about a quarter of the homes in total. There are outside buyers, and they do affect the price of housing, but that’s not the main reason.
Vermont and New Hampshire have higher percentages of outside buyers than Hawaii, yet they have much lower housing prices.

Looking at the data from 2010, outside buyers have generally been buying less of the homes in Hawaii, yet home prices continue to skyrocket. During that same time frame, local residents have actually been buying a larger share of the homes. So that means there’s more to the story.

Even then, you’d think that states with a lot of outside buyers would have high home prices. We looked at all 50 states. Vermont and New Hampshire have higher percentages of outside buyers than Hawaii, yet they have much lower housing prices.

California has one of the lowest numbers of outside buyers, yet they have some of the highest home prices. Statistically, there really isn’t a clear relation to outside buyers. The clear pattern emerges when you look at the regulatory index and the regulatory climate: how difficult it is to build a home and how does that restrict supply?

Nothstine: Tell us about the Jones Act. It’s a federal law that was passed over 100 years ago, so why is that relevant to Hawaii and housing costs?

Kefalas: Most people on the mainland don’t know about the Jones Act. It likely has more identification here because of how it impacts Hawaii. The Jones Act essentially says that goods transported from one US port to another must be transported on ships that — for maintenance — are American-owned. They must have an American crew, fly the American flag, and are required to be American-built ships.

The last part is the big one because ships built in America typically cost four to five times more than those built by allies like Japan or South Korea. We don’t have this sort of restriction on cars or planes. You can buy a Toyota tomorrow and there’s no issue. We came out with a study a few years back that shows that the Jones Act costs Hawaii $1.2 billion annually, and a lot of these costs get passed on to local families. That includes 9,000 fewer jobs and about $150 million in unrealized tax revenue.

If we look particularly at housing, the Jones Act drives up the costs of imported construction materials. Things like sand, cement, steel, and even bricks must get shipped to Hawaii. Due to the Jones Act and the lack of ships that can carry this type of cargo, you have sky-high prices and fewer jobs. It’s hard with estimates, but it probably adds $50 to $250 million to the cost of real estate and construction.

Unfortunately, this is a federal issue and not something that the state can do anything about. Hawaii’s US Rep. Ed Case previously worked on some bipartisan legislation with Utah Sen. Mike Lee, but as most things go in DC, it was eaten up by the swamp and the maritime special interest groups. I’m not sure if or when we’ll see a change on that issue. A lot of folks here are keeping our fingers crossed.

Nothstine: Let me ask about the 2023 Lahaina fire on Maui because, for most people on the mainland, that’s probably now off their radar. But many are displaced by natural disasters here and can relate to worry about being displaced from their homes and land. What reforms are there to remedy a tragedy in Lahaina? I would love to hear what you guys have learned from that or what solutions there might be.

Kefalas: I’m glad you asked about that because it’s something that’s still very real for the people who were impacted by the fires. They lost loved ones, homes, and businesses. A lot of the rebuilding efforts are just now getting started, more than a year after the fire. The long recovery time so far has been in part due to the regulatory maze that Maui County puts up.

That has stifled things like home building in general. It’s why the county has some of the highest home prices in the country and that was before the wildfires. We released a report on the first anniversary that looks at six different ways that lawmakers can alleviate the situation, at least in the short run. I don’t want to go through all six of them, but I’ll highlight some of the more impactful ones.

First, I think we should waive permitting fees for all Maui residents seeking to rebuild a damaged or destroyed home. This isn’t unheard of; Kauai was devastated back in the early ’90s by Hurricane Iniki, and the Kauai County Council waived all building permit fees for structures that needed to be repaired or reconstructed. Another suggestion would be to allow nonconforming buildings to be rebuilt.

If you’ve ever been to Lahaina, there was a definitive charm about it, partially due to a lot of those old buildings. They wouldn’t be able to be built today based on the current county codes, but we think people should be able to build back what they lost. We’re glad Maui County Council is considering Bill 105, which we’ve been working with them on, would allow exactly that.

Then, finally, there is allowing churches, temples, synagogues, and other charities that own a lot of land to be utilized to provide temporary or even permanent housing to individuals in need. Their financial resources make it difficult — they can’t wait the 10 years, that long and extensive process of obtaining necessary permits, to build homes.

To help these types of organizations play a bigger role, we want to enact a “Yes in God’s backyard” law that would provide more certainty and flexibility to these groups that need to do what they do best: serve their communities during difficult times. We’re hopeful that the Council will take that up.