honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Sunday, April 23, 2006

COMMENTARY
Affordable housing strategy needs rethink

By Craig Watase

In Hawai'i, we have an affordable-housing crisis because not enough homes are built to meet demand.

ADVERTISER LIBRARY PHOTO | Aug. 6, 2003

spacer spacer

I've been asked to share my vision of why there is an affordable-housing crisis, opine on some of the housing bills being proposed by the Legislature and offer ideas on how we can house Hawai'i's residents.

It is important to keep in mind that this is a discussion on housing, not homelessness. While homelessness issues can be somewhat tied to the affordability of housing, they are also largely a multifaceted challenge dealing with education, drug abuse, unemployment, mental health and sometimes even lifestyle choices.

On the other hand, the affordability of housing is purely a function of available income relative to the sale or rental price of a home.

"Available income" is affected by how much we make at our jobs and how much we spend. It wasn't that long ago that people couldn't afford a home because they couldn't get a job. Well, now we have jobs — good-paying jobs, in many cases — but not good enough relative to the price of a home.

So let's focus on the price of a home.

First, Economics 101: Housing prices are set by supply and demand. In Hawai'i, we have an affordable-housing crisis because we are not producing enough homes to meet the demand.

On O'ahu, we were producing more than 4,000 housing units in 1993. In 2004 and 2005, the housing industry produced fewer than 2,500 units.

In 1993, the median price of a home (overall single-family and condo) was about $250,000. Today the overall median is more than $450,000. Keep in mind that new-household formation is projected at about 3,500 households per year on O'ahu, and that estimate was made before the Stryker Brigade.

It is not the investor market. Investor units typically add to the rental pool. We are clearly not even producing enough homes to meet the demands of new-household formation.

Without competition from new homes, the resale market will continue to command high prices and drive the median sale prices up.

Unmet demand will drive up the cost of rentals, and families will start doubling up or living in smaller, less-expensive homes, just like in the late 1980s and early '90s.

Other factors affecting the price of homes in Hawai'i include interest rates, availability/cost of land (entitlements like state land use and county zoning approvals), availability and cost of infrastructure (water, sewer, roads, schools, parks, etc.) and construction cost.

Basically, government can affect housing in two ways: It can subsidize it or it can entitle it.

It costs $150,000 to $250,000 to subsidize an "affordable" rental unit, depending on the size and type of the unit and which income level is being targeted.

Let's say it cost $200,000 per unit of subsidy. Some reports have it that we are more than 10,000 units short in Hawai'i.

If we had to subsidize just 5,000 units, it would cost taxpayers about a billion dollars!

These are a few things I think government should be doing to solve the affordable-housing crisis for the long run:

  • Sell existing state- and county-owned rental units.

    Buyers would be required to use 4 percent federal Low Income Housing Tax Credits, or LIHTC, and private placement, tax-exempt revenue bonds. The LIHTC program would place deed restrictions that would ensure the long-term preservation of the units as affordable rentals.

    The state/county would not have to spend millions annually in maintenance and liability exposures.

    Even if the net income from a sale was only $50,000 per unit, the sale of 4,000 units would raise $200,000,000! That would be enough to subsidize the new development of about 1,000 new units without any notable cost to local taxpayers.

    There is no reason for government to own housing stock.

  • Build the rail transit system.

    Without a rail transit system, we will not be able to increase the densities of our urban core and stop urban sprawl. It is a misconception that it is cheaper to build on existing infrastructure.

    Furthermore, if rail transit is planned with housing in mind, the city and state can trade land use and zoning entitlements in exchange for affordable housing along the route.

  • Eliminate the duplications in the land entitlement process.

    Without developable lands coming online in a timely fashion, the housing demand cannot be met. The process takes so many years that building homes is akin to making a fireman fill out forms and approvals for six days before he is allowed to respond to the fire.

  • Tort reform.

    My guess is construction costs have almost doubled since five years ago. While we can't do much about wages and materials, my experience is that one of the major reasons for increases in prices is insurance cost. This society is way too litigious.

    Prices in housing may largely be attributed to the cost of insurance (general liability, workers' comp, professional liability, property, employee health, bonds, etc.) And this is not just for the developer and the contractors but for every company that has something to do with the house.

    Insurance cost was cited as one of the reasons why the Consuelo Foundation are leaving the self-help housing business.

  • No more impact fees.

    Let's hope we are not doomed to repeat history. Legislators are tempted to do what they did in the '80s, which was to require market-price homes to bear the cost of subsidizing affordable homes. The infamous "60/40" policy, where 60 percent of the homes had to be affordable, caused huge and falsely inflated values in market homes.

    Many in the industry believe it was this policy that caused the last real-estate bubble and pop. It is a simplistic solution that sounds good to the public, because unless you are buying a new home, affordable housing is being built at someone else's expense.

    The conveyance tax, unilateral agreements and other such fees only cause new homes to increase in price and actually drive down the production and supply of homes.

    This is precisely the opposite of what needs to happen.

    If state and local government want to subsidize affordable housing, they should do it in the ways described above or by leveraging federal programs from the Department of Housing and Urban Development, the U.S. Department of Agriculture, the Veterans Administration and the Internal Revenue Service. The fact is that previous administrations raided those funds, and our legislators let it happen. That must stop.

    Keeping track of Hawai'i's housing legislation is like trying to keep track of my fantasy baseball team: difficult.

    Part of the lack of progress is that the House and Senate approach legislative solutions from different philosophies. The House looks at it from a social-services point of view; the Senate takes a more economic approach.

    In general, most of the legislation is well-meaning, but much of it is ineffective and demonstrates a lack of understanding of how to impact affordable housing.

    For example, HB1877 and HB2242 propose to have all new developments of more than 50 units make 20 percent of them as "affordable." That's simply bad policy, and the city and state already impose these impacts through unilateral agreements for zoning and land use.

    Other bills propose general excise tax exemptions, property tax freezes and expedited processing for affordable housing.

    Again, while the details of the bills may have expanded the scope of benefits, these are things that have been available to affordable-housing developers for as long as I can remember. Plus, a $4,000 general excise tax incentive exemption will hardly pay for the cost and delays of an environmental impact statement or the union wages scales that would then be required for getting a government subsidy.

    A few words on state tax credits: Whether for housing or high tech, I find the use of a state tax credit to be a poor use of state dollars. When those tax credits are sold to investors that have state tax liability, these investors will typically pay no more than 50 cents to 60 cents on the dollar.

    Investors lose the federal tax deduction when they buy a state tax credit. As such, the state is only getting about half the bang for the buck.

    Keep it simple and just put the money into the Rental Housing Trust Fund or Dwelling Unit Revolving Fund.

    There are a lot of little things lawmakers could do that may look like housekeeping, but they will make existing programs work better or be better funded.

    They include:

  • Separating public housing (a social service) from state finance and development operations. This recognizes the difference between housing issues and homelessness issues.

  • Stopping the transfer of housing money to the general fund.

  • Making state lands available for affordable-housing development.

  • Continuing support for rail transit.

    None of the legislation now before the Legislature will bring quick relief to Hawai'i's housing situation.

    Even excitement about shifting more of the conveyance tax "to raise up to $28 million more for rental housing" is put in perspective when you realize that's only enough to build 140 more units per year — and that it will take at least four years before you see those efforts bear fruit.

    But if you think housing prices are high now, watch what happens if some of the city Charter Commission's licentious, anti-housing proposals are accepted. You can bet that your children and grandchildren will be living in Iowa.


    Correction: An earlier version of this story erroneously cited proposals before the city Planning Commission. It should have said Charter Commission.