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Economic Currents

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The Unintended Consequences of Affordable Housing Policy

Honolulu City Council Resolution 13-168 would amend the percentages of affordable housing units that developers must provide to receive authorization for housing projects.  Current city policy requires that 10% of a development's units must be affordable for households earning no more than 80% of the HUD median income for Honolulu. Another 10% of units in a development should be affordable for families earning between 80 and 120% of the median income, and 10% for families earning between 120 and 140% of the median income. The resolution proposes that the mix of affordable housing required of developers be reconsidered. The intent is to change the requirements in a way that leads to more affordable housing for those who need it the most.

While requiring developers to set aside a fraction of a project to be sold at below market prices may seem like a reasonable way of dealing with the problem of affordable housing, economic theory and years of experience suggest exactly the opposite. Such requirements, known as inclusionary zoning (IZ), act as a tax on developers with the proceeds used to subsidize housing for gap income households earning between 80 and 140 percent of the median income. But that tax reduces incentives for developers to produce all forms of housing, and will reduce the overall supply of housing units and increase the price of housing.

In 2010, UHERO conducted a comprehensive review of studies that analyzed IZ policies across the United States.1 Approximately 90% of the studies concluded that IZ increases the market price of housing and decreases housing units available in the market. Of the 18 studies that were able to quantify the effect of inclusionary zoning on housing market outcomes, 13 found that IZ policies both increased the market price of housing and decreased housing units available in the market, and three more studies found evidence of at least one of those effects. UHERO’s report concluded that “Inclusionary Zoning policies have failed in other jurisdictions, and are failing on Oahu.” Such policies have not delivered substantial numbers of affordable housing units to households the programs were designed to help.

The undersupply of housing services relative to household formation on Oahu is a chronic problem. While IZ policies are politically appealing, they mistakenly tax housing to encourage more of it! The effect of a tax on the production of any product, housing included, is relatively straightforward. The extra tax imposed by IZ increases the cost to developers and limits the supply of housing provided. Facing the additional cost, developers will build fewer housing units, all else equal. In the worst case scenario, if the expected loss on the affordable units does not allow developers to meet their required rate of return, then projects will never get off the ground. The primary means of insuring the project is viable is to produce more upscale, higher priced homes to offset the loss on the subsidized housing.2 So, the IZ tax not only reduces the overall supply of housing, it also changes the mix of housing by encouraging higher end and more expensive housing developments.

“Low-cost housing is usually produced through a process called filtering where existing housing units drop in cost as their relative quality falls, rather than through construction of new, lower-cost units.” (Feldman, 2002 p. 9) Over time, the existing stock of housing depreciates and declines in quality relative to new amenity rich units. For example, new housing often includes central air-conditioning and energy saving appliances, whereas twenty years ago few housing units would have such amenities. The construction of new housing units also increases the overall supply of housing, which increases the supply of lesser quality units to those with lower incomes as owners of older homes “trade up”. (Feldman 2002, p. 10). Malpezzi and Green (1996, p. 1811) also found that “high-quality new construction is associated with growth in the low-quality stock as well... [T]o the extent that a city makes it easy for any type of housing to be built, it will also enhance the available stock of low-cost housing.” By discouraging construction of market priced housing, IZ reduces filtering and leads to less low-cost housing than without these well-intended policies.

On Oahu IZ policies also miss the cyclical nature of the affordability problem. The figure below shows the maximum affordable mortgage3 for four Honolulu income groups from 1990 to 2012 and median resale prices of single-family homes and condominiums from the Honolulu Board of Realtors.

From 1990 to 1995, at the end of the last Oahu housing cycle, single-family homes remained out of reach of households earning 140% of the HUD median family income (MFI). Yet from 1996 to 2003, households in the 120-140% MFI bracket could afford the median priced home, and all gap income households could afford a median priced condo from 1996 through 2005. From 1992 to 2012, all income groups except the 80% group could afford the median priced condo.

The recent peak in unaffordability occurred in 2007 at the height of the last housing cycle. The declining price of homes through 2009 and the record low mortgage rates since then has once again brought single-family homes within reach of the top gap income group. And, condos are again within reach of all gap income levels. Imposing more costly affordability taxes on developers at this stage of the home building cycle will result in some small increase in the number of new affordable housing units. But, the tax will also accelerate the end of the construction cycle by leading to a more rapid increase in home prices and eventually closing off demand for the higher priced units developers need to build to cover their costs. IZ policies will endanger project viability by squeezing profit margins, especially as other construction costs rise and home prices flatten out. The result is that less housing will be produced than otherwise would be the case.

Reducing or eliminating overly burdensome regulation on development, including inclusionary zoning, will increase affordability of housing for two reasons. First, it will encourage building, increasing the overall stock of housing, which will help hold down the market price of housing. Second, removing IZ will facilitate the natural “filtering” process, with newer units going to higher income households and older depreciating units being increasingly occupied by lower income households. Finally, IZ policy misses the basic fact that affordability problems arise not just due to the high cost of housing. The affordability problem is a dual problem of high prices and low incomes. Just as is done in Federal Housing Assistance programs, affordability could be addressed through housing subsidies that help households purchase or rent housing units.

 ---Carl Bonham



1See Bonham, Burnett, and Kato, “Inclusionary Zoning: Implications for Oahu’s Housing Market”, February 2010.

2Of course, this only works when there is a demand for higher priced units.

3UHERO calculates the Affordable Mortgage as the maximum mortgage a household earning the HUD Median Family Income for Oahu could afford after a 20% down payment and assuming the household spends no more than 30% of its monthly income on the mortgage.



Bonham, C., Kimberly Burnett, and Andrew Kato. 2012. Inclusionary Zoning: Implications for Oahu’s Housing Market. UHERO Project Report, accessed at http://www.uhero.hawaii.edu/assets/UHEROProjectReport2010-1.pdf.

Feldman, R. 2002. The Affordable Housing Shortage: Considering the Problem, Causes and Solutions. Federal Reserve Bank of Minneapolis. Banking and Policy Working Paper 02-2.

Malpezzi, S. and R. K. Green. 1996. What has Happened to the Bottom of the U.S. Housing Market? Urban Studies. 33(10): 1807-1820.

The Impact of Marriage Equality on Hawai′i’s Economy and Government: An Update After the U.S. Supreme Court’s Same-Sex Marriage Decisions

The U.S. Supreme Court’s decisions in the two same-sex marriage cases have substantially increased the short-term and medium-term benefits that could accrue to Hawai‘i if the Hawai‘i State Legislature enacts legislation allowing same-sex marriages to begin in Fall 2013 or early in 2014. Our updated report comes to the following conclusions.

  • The U.S. Supreme Court’s decision to overturn California’s Proposition 8 and allow same-sex marriages to resume again in California has massively increased the potential gains to the state’s tourism industry from same-sex couples visiting Hawai‘i either to marry or to honeymoon and from guests attending their weddings or marriage celebrations. This is because marriage equality in California increases the proportion of Hawai‘i’s visitors from states with marriage equality from 18 percent to 54 percent. We estimate $166 million in additional spending over the 2014-2016 period from marriages and honeymoons of same-sex couples visiting from states with marriage equality.
  • The U.S. Supreme Court’s ruling in the DOMA case has opened the door to a limited set of federal rights for all same-sex couples regardless of whether they live in a state with marriage equality. Some same-sex couples from states without marriage equality now have incentives to travel to another state to marry and honeymoon. Some of these couples would choose to marry and/or honeymoon in Hawai‘i if same-sex marriage were legal in Hawai‘i. Including spending from marriages and honeymoons of same-sex couples from states without marriage equality increases total additional spending to $217 million over the 2014-2016 period.
  • We estimate that marriage equality in Hawai‘i will increase State of Hawai‘i and City and County of Honolulu general excise tax revenues by $10.2 million over the 2014-2016 period. State income tax revenues would also increase, but we have not estimated their magnitude.
  • Without access to marriage in Hawai‘i, local same-sex couples can only gain access to federal marriage rights by traveling to the U.S. mainland to marry. This reduces same-sex couple spending in Hawai‘i, harms the Hawai‘i wedding industry, and raises the cost to many Hawai‘i same-sex couples of becoming married.
  • Marriage equality in Hawai‘i would lead to substantial federal tax savings for married same-sex Hawai‘i couples with a spouse as a beneficiary on the other spouse’s employer-paid health insurance. Marriage equality would also allow married Hawai‘i same-sex couples to become eligible to draw spousal benefits from a number of federal programs, including social security.

--Sumner La Croix 
and Lauren Gabriel 


US Marines Moving From Okinawa - Pacific Beat Interview

The United States announced plans on June 20 to move about a quarter of the ~20,000 US marines based in Okinawa to Guam, Hawaii, the US mainland, the Philippines, and Australia over the next 13 years. Are those plans still moving forward?

Yes, they are, but an editorial in last week’s People’s Daily, a leading Chinese newspaper, added some uncertainty to the situation.  In the editorial, the legitimacy of Japan’s rule over the entire Ryukyu Island chain was questioned.  Okinawa is part of the Ryukyu island chain and it is certain that this Chinese government-sanctioned editorial did not go over well in Tokyo or Washington. If this type of rhetoric continues, Tokyo may well want the Marines to stay in Okinawa.

What do we know about the relocation to Hawaii?

Between 1,000 and 2,700 of the 4,700 marines being moved will likely end up on the island of Oahu.  The U.S. Dept. of Defense has commissioned three separate studies to evaluate several potential locations to house the marines.

They include the already crowded Marine Corp Air Station in Kaneohe Bay.  It currently houses 7,500+ marines.  Considerable new construction would be needed.  There could also be stress on training facilities in the vicinity.

Camp Smith, near Pearl Harbor, houses 1,700+ marines but they are mostly associated with the Pacific Command.  Housing relocated marines there is unlikely.


What about the other two locations?

Two other possible locations are the decommissioned Naval Air Station Barbers Point and Pearl City Peninsula.

Pearl City Peninsula is a lightly developed residential peninsula that pushes out into the center of Pearl Harbor.  It’s a good location but environmental and cost considerations could make it an expensive choice.

The decommissioned Naval Air Station Barbers Point is more intriguing.  At the end of the cold war, the Base Realignment and Closure Commission (BRAC) recommended its closure in a 1993 report and the base closed in 1999.  Since then efforts to redevelop the closed base have been a total failure.  

This location certainly has a lot of potential, but also would require major investment.  It does have an airstrip that could be brought back into use, but almost all other facilities would need to be built from scratch.  Whether Congress would want to spend the kind of money needed to bring this closed base back to life is unclear.


Where’s the marine relocation on the Hawaii political radar?

The story has not been extensively covered in Hawaii’s newspapers and media and so there has been little public discussion of the topic. Hawaii’s governor, congressional delegation, policymakers and legislators must surely be talking about it, as it has considerable potential to generate more medium-term construction spending. That’s important, as the Hawaii construction industry has been slow to recover from the 2008-2009 downturn and still has large numbers of unemployed or underemployed workers.  

On the other hand, Oahu already hosts several military bases, and it would not be surprising to see a backlash develop against the relocation if the new housing and facilities are located on lands not currently being used by the military.

--Sumner La Croix




The Challenges of EV Efficiency In Hawaii

Earlier this month, U.S. Department of Energy launched a website that calculates “the cost of fueling a vehicle with electricity compared to a similar vehicle that runs on gasoline”.

The mission of this gadget is to encourage consumers to switch to electric cars by:

• bringing greater transparency to vehicle operating costs

• helping drivers determine how much they might save on fuel by choosing an electric vehicle (EV)

• showing the low and steady price of fueling with electricity.

Announcing the launch of the website, the new Secretary of Energy, Ernest Moniz, stated that EVs could not only save consumers on fuel, but also reduce the dependence of our nation on oil. Those goals may be harder to achieve in Hawai’i than in the rest of the nation.

First, according to the eGallon website, while it costs the average driver in the US less than a third to drive an EV than a conventional gasoline vehicle (saving them more than 68% on fuel cost*), Hawai‘i residents save only 5 cents per gallon on gasoline (less than 1.5%). That explains why the first goal (saving consumers on fuel costs) is harder to achieve in Hawai‘i.

Second, while less than 1% of US electricity is generated from oil, Hawai‘i currently generates 75% of its electricity from oil. This explains why the second goal (reducing dependency on oil) is harder to achieve through EVs in Hawai‘i.

Finally, an often-quoted goal of increased EV penetration is to lower greenhouse gas (GHG) emissions from the transportation sector—as the largest and fastest growing component of state GHG emissions. Achieving that goal is also currently easier in the rest of the nation where more than 40% of electricity comes from cleaner sources than oil and coal (i.e. renewables, nuclear, and natural gas).

Therefore, both of the objectives mentioned by the US Energy Secretary are harder to achieve in Hawai‘i, unless consumers charge their vehicles themselves, for example using their own rooftop PV systems. That way, they could save more on vehicle fuel costs and help the State reduce their reliance on oil.


---Iman Nasseri and Kimberly Burnett 


*It is worth mentioning that both this website and much of the media tend to examine “pump prices” for passenger cars. Although EVs show a lot of promise in much of the US in terms of fuel cost per miles compared with gasoline and other alternative-fueled vehicles, considering the higher capital cost of EVs than their similar class conventional gasoline vehicles (Please refer to section 2.8 of Transitions to Alternative Vehicles and Fuels), they may not look as promising in terms of overall cost per mile.

UHERO 101.3: Can the Median Household afford the Median Home on Oahu?

With recent months of record low interest rates and a strengthening economy, individuals and families in Hawaii are increasingly looking into becoming homeowners. How realistic is this possibility? Do families have enough for the down payment, and will the median household income qualify for a loan? How will a monthly mortgage payment compare to the rent you are currently paying? This week’s UHERO 101 takes a look at the median income family on Oahu and examines how far that income will take them into the Oahu housing market.

We start with very simple assumptions: a required down payment of 20% and an income in which 30% or less would go towards housing. In May of this year, the median single family home on Oahu was $630k and the median condo $315k. In our calculations below we assume a mortgage rate of 4.0%.

At current interest rates, if your dream is a single family home, you will need $126k to put down initially, and an income of right over $96k. Your monthly payment would be in the neighborhood of $2,400. If condos are more your style, your down payment would be in the $63k range, and you’d need an income around $48k. This leaves you with a monthly mortgage of $1,200.

How affordable is all of this to the median household on Oahu? As the chart below illustrates, even in today’s environment of relatively low interest rates, the median family income would not be able to afford the median-priced home. Only at rates well below 3% does the median home become affordable to the median household. To add insult to injury, the reality is that both interest rates and median home prices are likely to increase in the near future. Our graphic illustrates how much less affordable the median-priced home becomes in the face of increasing rates and home prices.

We hope this simple calculation helps shed light on the “affordability” of housing on Oahu. We may need to delay the housewarming party.


---Kimberly Burnett and James Jones


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