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FRBSF

WEEKLY LETTER

Number 92-21, May 22, 1992

Can Paradise Be Affordable?
Hawaii has the distinction of having the highest
housing prices in the nation. The median price
of a house in Honolulu stood at $335,000 in late
1991. In comparison, the median price of the
second highest market (San Francisco) stood at
$252,000, while the national median price was
only $100,000.
The gap between Hawai i and the nation has
been growing in recent years. In 1985, average
prices were 64 percent above the national average; in 1990 prices were more than 142 percent
higher.
Home prices also are higher relative to income
in Hawaii. In terms of affordability, a person
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percent of the income necessary to qualify to
buy a median priced single family home. This
compares to a national figure of 120 percent;
that is the national median income exceeds the
income needed to qualify for a median priced
home. The lack of affordable living space is of
growing concern to policymakers and has led to
several initiatives to promote low-cost housing in
Hawaii.
In this Letter we evaluate various demand and
supply aspects of the Hawaiian housing market
to understand the factors leading to these high
prices. We argue that a combination of growing
demand and restricted housing supply goes a
long way to explain Hawaiian housing prices.
Land-use policies favor agricultural and open
space and restrict residential development. The
lack of affordability resulting from growth controls is a clear illustration of the tradeoff between
the amenities resulting from preserved open space
and the social value of affordable housing-a
policy tradeoff that is faced in housing markets
elsewhere in the Twelfth District and die United
States.

population has risen at an annual rate of 1.95 percent, compared to a national average annual rate
of 1.02 percent.
Growth in population has been possible because
of relatively strong employment gains (2.9 percent per year) driven by a boom in tourism. The
number of visitors to Hawaii has more than
tripled since 1972, with strong growth from both
the U.5.1Canada mainland (165 percent) and
Asia (388 percent). To meet the needs of these
tourists, service sector jobs have expanded at a
5.0 percent annual rate, with hotel employment
rising 135 perc;ent. In addition, construction of
new resort facilities has provided strong job
opportunities, as the number of hotel rooms
doubled from 36,608 to 72,237.
An additional consequence of increased tourism
has been increased demand for vacation homes
by both mainlanders and Japanese, which reduces available supplies for permanent residents.
Particularly in recent years, the press has reported
a number of Japanese purchases at very high
prices. Although this investment has had some
effect on boosting prices in high-end residential
markets and nonresidential resort properties,
studies show little effect of Japanese purchases
on median residential prices.
All these factors have boosted the demand for
housing in Hawaii. Higher demand for housing,
however, does not necessarily imply exorbitant
prices. In a well-functioning housing market, increases in demand will raise prices in the shortrun, but lead to an expansion of supply as new
housing is constructed and existing housing is
expanded and improved. The long-run supply of
housing is expected to be more elastic than the
short-run supply. If the supply of housing is constrained by geography or land-use policy, however, higher prrces will result.

Housing demand in Hawaii

Housing supply

At the most basic level, growing demand for housing in Hawaii reflects population growth that is
nearly double the national average. Since 1972,

While demand has been rising, supply has been
constrained by some of the strictest land-use
policies in the United States. By state law, less

FRBSF
than 5 percent of the state's acreage is available
for urban development. Chart 1 shows that a little
over 4 percent currently is categorized as urban.
The rest is equally split between agricultural and
preserved tracts. Of the 1.7 million acres of agricultural land, however, only 327,000 is actually
zoned for crops, and only half of that is harvested. The vast majority of agricultural land
stands as pasture, woodlands, or open space.

Recent prices also have exhibited upward pressure from other cyclical factors. Analysts studying
the market suggest that demographic and social
factors, together with lower interest rates, are
prompting an unusually large number of residents to move up to higher priced housing. A
similar pattern was noted in the late 1960s and
early 1980s.

Chart 1
Land Use in Hawaii
(Total Land Area: 4.1 million acres)
Other Agriculture
(Pasture) 41%

Effects on market composition
These supply and demand conditions have had
several predictable effects on the Hawaiian housing market. Multifamily housing comprises 38.1
percent of all units in Hawaii, versus a national
average of 29.8 percent. A larger than average
share of the population lives in multifamily housing (27.8 percent versus 23.2 percent in the
nation as a whole). Moreover, the average living
area in multifamily units in Hawaii has declined
by over a third, from 1,289 square feet in 1970 to
711 square feet in 1990.

Conservation

48%

As shown in Chart 2, median prices for single
family houses rose 118 percent between 1980
and 1990, compared to a 63 percent increase
as a whole. This dramatic increase in
in the
prices is the result of a tight housing market,
not greater ability to pay. Per capita income in
Hawaii is only 4.7 percent above the national
average, making the ratio of housing prices to
median income the highest of any state in the

u.s.

u.s.

Chart 2
Average Sales Price of Existing Single Family Homes

Dollars
350,000
300,000

• Hawaii

Iii! U.S.

More recently, prices have received another upward jolt because of the renewal of long-term
leases. A large part of the Hawaiian real estate
market is built on leased land. With the sharp
gain in land prices in recent years because of
increasing scarcity, real estate analysts report that
those renewals often lead to larger than anticipated increases in rents.

250,000
200,000
150,000

The reduction in average unit size has helped
slow the growth of rents. Rents continue to rise
faster in Hawaii than elsewhere, however. Between 1980 and 1990, median rents in Hawaii
rose 121 percent, compared to an increase of 88
percent nationally. On average, rents per square
foot are 50 percent high,er in Hawaii than in the
rest of the country. Because of this faster growth,
average Hawaiian rents in 1990 stood at $599
per month, compared to a national average of
$374. (In Oahu rents are considerably higher,
averaging $1150 per month for apartments.)
Similar trends are observed in the single family
market. Increasing scarcity has caused average
single family housing units to downsize. Lot
sizes, in particular, have decreased in size to
offset some of the effect of higher land costs.

100,000
50,000

o

Promoting low-cost housing
In Hawaii, concern over affordability has spurred
many local governments to promote low-cost
housing. In many cases, developers are required
to set aside a certain portion of new construction

as affordable. Recent policies have offered to cut
red tape in the development process in return for
devoting 60 percent of the units to affordable
housing. In 1990, 636 units were built under this
program, compared to 330 completed outside
the program. Developers' interest in the program
is waning, however, because of weak demand for
the expensive homes in the development, which
in the past subsidized the cost of building the
affordable units.
The affordability of these "affordable" units also
may be temporary. While housing is affordable
for those lucky enough to make the initial purchase, at the time of resale, the price of the affordable houses often rises to the higher market
level. Moreover, affordable housing requirements
can deter developers from building middle-range
housing, since they must compensate for the lowpriced units by building very expensive units.

however, in the zoning of large expanses of land
for agriculture, even though it is uncultivated.
Uncultivated agricultural land (pasture, woodlands) provides much of the same value as parks
or preserved lands.
In sum, the restriction of the usage of land for
agricultural purposes is not supported byeconomics alone. Agricultural output is not intrinsically more socially 'vvorthythan other forms of
economic output. If agricultural use of land is
more aesthetically pleasing, however, there may
be positive production externalities that would
not be valued in the marketplace. Indeed, these
amenities act to raise the demand for Hawaii real
estate. Such public good aspects of agriculture
are an argument for protecting land-use controls.
The tradeoff, however, is a restricted housing
supply.

Conclusion
Open space versus affordability
Concern over housing affordability also has led
to proposals to change the land use mix-principally to convert agricultural land to urban use.
From the perspective of generating income, converting large portions of agricultural land appears
to be warranted. In 1990,41 percent of the land
was used for agriculture, and it produced only
1.2 percent of the personal income of the state
directly, plus an additional 1.0 percent of income
indirectly through jobs created in food and fiber
processing. Moreover, agriculture is diminishing
in Hawaii, with pineapple and sugar cane production declining, while other industries are
expanding.
These figures understate the current value of that
land, however. Hawaii is valued as a tourist destination and a place to live because of its natural
beauty. Overdevelopment of the Islands would
diminish this beauty. This explicit value of open
space is reflected in preserving lands for natural
parks and wildlife refuges. It also is reflected,

The Hawaiian experience provides a dramatic
example of tradeoffs in land-use policies that are
being examined in much of the Western United
States. Similar debates about development versus
preservation of open space are taking place in
the San Francisco Bay region, Seattle, Los Angeles,
Portland, and other areas·experiencing rapid
increases in population.
Land use policies that preserve space for parks
and agriculture result in social benefits ranging
from physical beauty to environmental protection. The tradeoff,however, is that competing uses
of the land also produce economic benefits. To
the extent that Hawaii land-use policies constrain
development, one result of these policies is a
scarcity of affordable housing. Explicit recognition of this tradeoff in policymaking potentially
will result in a more efficient use of Hawaii's natural endowments.

Brian A. Cromwell
Economist

Ronald H. Schmidt
Senior Economist

Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor or to the author•... Free copies of Federal Reserve publications can be
obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 974-2246, Fax (415) 974-3341.
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Index to Recent Issues of fRBSf Weekly Letter

DATE
12113
12/20
1/3
1/10
1/17
1/24
1/31
2/7
2/14
2/21
2/28
3/6
3/13
3/20
3/27
4/3
4110
4117
4/24
511
5/8
5/15

NUMBER TITLE
91-43
91-44
92-01
92-02
92-03
92-04
92-05
92-06
92-07
92-08
92-09
92-10
92-11
92-12
92-13
92-14
92-15
92-16
92-17
92-18
92-19
92-20

The Independence of Central Banks
Taxpayer Risk in Mortgage Policy
The Problem of Weak Credit Markets
Risk-Based Capital Standards and Bank Portfolios
Investment Decisions in a Water Market
Red Ink
Presidential Popularity, Presidential Policies
Progress in Retail Payments
Services: A Future of Low Productivity Growth?
District Agricultural Outlook
The Product Life Cycle and the Electronic Components Industry
Japan's Recessions
Will the Real "Real GOP" Please Stand Up?
Foreign Direct Investment: Gift Horse or Trojan Horse?
U.S. International Trade and Competitiveness
Utah Bucks the Recession
Monetary Announcements: The Bank of Japan and the Fed
Causes and Effects of Consumer Sentiment
California Banks' Problems Continue
Is a Bad Bank Always Bad?
An Unprecedented Slowdown?
Agricultural Production's Share of the Western Economy

AUTHOR
Kim
Marti n/Pozdena
Parry
Neuberger
Schmidt/Cannon
Zimmerman
Walsh/Newman
Laderman
Schmidt
Dean
Sherwood-Call
Moreno
Motley
Kim
Glick
Cromwell
Hutchison/Judd
Throop
Zimmerman
Neuberger
Trehan
Schmidt/Dean

The FRBSF Weekly Letter appears on an abbreviated schedule in June, July, August, and December.