Across the street from Ala Moana Beach Park, between Ward Center and the shopping center, there are condos in the million dollar-plus range. For the most part they are vacant, unused by their absentee owners.

The beach park is like a front yard for these condos, part of the reason they are so valuable. Periodically the cash-strapped Honolulu city government “sweeps” the homeless from the poorly maintained park.

This one spot captures the central elements of Honolulu’s problems with housing.

What is so strange about the Honolulu housing market is that the entire local population that could afford these condos — at an average home price of $800,000 — could live in these few buildings.

About 1,000 people living on Oahu have that sort of money. This is an example of what two economists, Furlong and Kramer found. Between 1975 and 2008, Honolulu home prices were driven by demand from the U.S. mainland or Japan.

Genshiro Kawamoto, the Japanese billionaire who recently sold his properties for $98 million can serve as a model for this economic phenomenon. Between 1988 and 1991 Kawamoto cruised around Kahala and east Oahu in his limo in the late ’80s purchasing properties at well above market value.

He actually turned some of his most expensive beachfront properties in Kahala into vacant lots. His was the face of the broader forces from Japan that drove demand and home prices during that period.

There was an economic logic to his actions. Kawamoto understood that the reason homes appreciate is the land under them. Otherwise home prices would rise at the same rate as all other prices. A vacant lot, a home, or unused agricultural land in Hawaii will all appreciate at pretty much the same rate.

You could hold these properties and bank the appreciation when you chose to sell, minus some costs that included interest, if you borrowed; maintenance on the property (or another word for it depreciation costs); and property taxes.

For Kawamoto the 35 cents per $100 Honolulu property tax was his only real expense. The vacant lots are smoking gun evidence that he was minimizing his costs of holding land. Honolulu property tax assessments are divided between the value of the land and the structure. Tearing down the buildings reduced his property taxes without affecting his expected return.

It was never reported how much Kawamoto made on the sale. Scattered evidence in various news articles suggests he sold for as much as 120 percent more than he paid. That is also what the FHA All Transactions House Price Index for Honolulu suggests. His return was about 5 percent per year. The Honolulu property tax he paid reduced this return to 4.99 percent. (Divide 0.35 by 100 and subtract from five.) A higher property tax rate might have led him to ditch the properties for a higher return elsewhere.

Kawamoto was a land investor not a land developer. An avatar for the economic motivation of those offshore who buy and hold real estate here. On the one hand it is an investment, while on the other hand you can live in it, rent it, farm it; or just leave it vacant. Most of the time you end up selling it for more than you paid.

The investment part — the appreciation — is driven by the demand for land. This demand is constrained by the costs of ownership; maintenance, interest rates, and taxes.

The good folks at the Lincoln Institute have calculated urban land values for 50 states. About 60 percent of the price of a single family home in Honolulu comes from its land value, while the national average is 18.5 percent.

If land were valued at the national average, the home price average in Honolulu would fall from above $800,000 to $380,000, and the median would fall to $276,000.

Kamamoto’s story illustrates how insignificant property taxes are in the decisions of those who buy real estate here. The national average for the 50 largest cities in each state is $1.65 per hundred dollars. A million dollar property in Honolulu pays property taxes amounting to $3,500 annually.

A million dollar home pays taxes amounting to $16,500 at the $1.65 rate. In Columbus, Ohio it would be $35,000. Honolulu’s low property taxes came about because schools were taken out of the county’s jurisdiction and placed under state government.

Low property taxes lead to high home, and land, prices.

On a million-dollar home, valuation formulas indicate that paying a $1.65 property tax rate would lower the value to $798,000. Empirical estimates of this effect indicate a range between the calculation above and $95,000.

Parenthetically Mayor Caldwell’s proposal for a one-third rise in property tax for offshore owners with million dollar properties would be ineffective.

Using the formula above reduces the price of a million dollar condo by $18,000 rather than $200,000. Eliminating the million-dollar minimum and taxing all nonresidents at a far higher rate would have a visible effect on home prices.

Economies with supply side problems have high prices and chronically high unemployment. We have high prices and chronically low unemployment indicating we have a problem created by demand.

The specific mechanism for that is the demand for housing and land here that is generated elsewhere. This flows into Hawaii as investment and drives all prices higher. In fact, it is why all prices are higher.

Unfortunately the reverse is also true.

In 1996, following the collapse of the Japanese economic bubble, the Honolulu price level as measured by the Consumer Price Index fell by six-tenths of 1 percent. In the past, steep increases in home prices, driven by this sort of investment, produced bubbles.

Home prices are now beyond the previous peak. This could actually mean that now the growing worldwide inequality in incomes and wealth is the driving force for home prices. You might want to calculate the size of China’s 1 percent.

About the author: Lawrence W. Boyd has Ph.D in economics with an area of specialization in labor economics, public finance and monetary economics. He is a tenured faculty member at the University of Hawaii at West Oahu Center for Labor Education and Research.

Community Voices aims to encourage broad discussion on many topics of community interest. It’s kind of a cross between Letters to the Editor and op-eds. This is your space to talk about important issues or interesting people who are making a difference in our world. Columns generally run about 800 words (yes, they can be shorter or longer) and we need a photo of the author and a bio. We welcome video commentary and other multimedia formats. Send to

About the Author