Sugar was once king in the islands. Nowadays, our not-always-benevolent ruler is land.

Our land-king helps to dictate the prices for our rentals and the purchase prices of our homes and workplaces. It drives up the cost of a wide range of goods and services. And it adds to the many price tags that make up our cost of living.

When it comes to renting and buying homes, the link to land values is fairly direct. The relationship of land to the cost of goods in our stores and services around the islands requires a little explaining.

Longtime real estate analyst Charles Wathen highlighted some ways that land boosts prices on products and materials that arrive via cargo ships in our ports. “A truck parked on expensive land takes it to a warehouse on expensive land. Then it is moved to a store on expensive land,” he said, only half-chuckling.

All of that expensiveness is passed on to us.

Faced with the accumulated expenses, some local consumers grumble that it is “just the price of paradise” — as though God bequeathed high prices on this Garden of Eden in the middle of the Pacific.

But the premium on life in the islands wasn’t dictated from the heavens; it comes, in large part, from the soil.

Honolulu skyline

The price of paradise has a lot to do with the soil beneath our feet. M. Shawn Hennessy

Where Land Rules

Land, of course, is just one of many intertwining factors that explain Hawaii’s relentlessly high cost of living.

Tourism, our largest industry, increases many prices by effectively making locals compete for cargo space and shipped-in goods with visitors who are willing to put up with outlandish prices during brief dream vacations. The military, which controls large swaths of land on Oahu, boosts the costs of non-military residents in several ways, including by taking up land civilians might otherwise live on. (If sprawling military bases across Oahu suddenly transformed into residential housing, it might help alleviate some of the island’s housing crisis, which might even restrain prices.)

Faced with the accumulated expenses, some local consumers grumble that it is “just the price of paradise” — as though God bequeathed high prices on this Garden of Eden in the middle of the Pacific.

The islands’ reliance on oil to generate most of our electricity is another ingredient in our nation-leading cost of living. So is the cost of delivering many basic goods to the islands in large metal containers.

Ultimately, all of those factors link back to a scarcity of usable land in the islands. Hawaii might be able stock up on huge amounts of oil and lock in bargain basement prices right now — if only it had a vast (and safe) place to store it all. Similarly, large international ships might be able to deliver huge caches of goods directly to the islands, rather than traveling to the West Coast and putting them on another ship to Hawaii, if there were affordable places to store such goods for longer periods of time. This would be akin to a bulk purchase discount, except that we don’t set aside the necessary space through permitting to make this work.

“When you limit the amount of retail space and storage space you have, land scarcity raises all prices,” Wathen explains.

Long Live the King!

Hawaii is, in many ways, similar to other desirable places like San Francisco and Manhattan, where there is also more demand for limited land than supply. So, barring dramatic economic jolts to the local economy, the value of owning a piece of the earth usually rises substantially over time.

But unlike those cities, which are partly or entirely surrounded by water, our archipelago doesn’t have bridges, trains, roads or even ferries that connect us to far more affordable suburbs or rural areas on cheap land. This makes us into a captive market for housing, office space, warehouses, goods and services and much more. And we all pay a price for that.

When it comes to housing, we pay a particularly high price. Over the last 30 years, despite the occasional real estate dip, like the recession-driven decline of 2009, the value of residential real estate on Oahu has risen by an average of nearly 5 percent per year. Contrast that with the many salaries that are only now returning to their pre-recession levels.

One indicator of the rising value of real estate — or at least the assumption of a rise — is the residential property assessments homeowners received in December. The assessments are notoriously imprecise and often contested by homeowners, but they are a key factor in updating property tax rates and they offer a broad picture of government perceptions of increases in the value of real estate. Authorities calculated an 11 percent leap in values for Leeward Oahu, 8.6 percent for the North Shore and 8.3 percent for the Urban Honolulu. Oahu-wide, the increase was about 7 percent, which is 40 percent above the annual 5 percent increase over the last 30 years.

Collectively, the last 30 years were good for land. We’re in a period when things are even better than average.

Kakaako Development

Construction-wise, Kakaako is the most dynamic area on Oahu, and it highlights the huge financial value of land that is permitted for construction.

PF Bentley/Civil Beat

The Hidden Costs

As is often the case when power is concentrated, the people often tend to bear many costs of that concentration — some obvious, some less apparent.

There are the formal taxes that individuals and businesses pay. Those rules are complicated, but nearly all of us face off with them when we file taxes each year.

But the “hidden” land tax, as Wathen describes it, has a more insidious side. It can act as a sort of handicap for our local economy — a little like the impact of sky-high oil prices on many countries’ economic growth in recent years. When so much money goes to cover the high cost of land before individuals get to other core expenses or companies generate any wealth, there ends up being less to spread around. This often means fewer dollars will be spent at the farmers market, the shopping mall or, in the case of companies, on employees.

As I’ve worked on this Living Hawaii series, I’ve spoken to mental health experts, techies, journalists, lawyers, politicians, government administrators, filmmakers, an ophthalmologist and many others who struggle to understand why people in Hawaii generally earn less than people who do similar work in West Coast cities that are more affordable. Why should an eye doctor in Hawaii earn 30 percent less than she or he might in Los Angeles? How come a mental health worker in a prison on Oahu can earn nearly twice as much behind bars in California?

There are many reasons. For one, the cost of living doesn’t have much of a natural connection to impact what employers pay unless a prospective employee is in a particularly strong negotiating position. Similarly, there are relatively few professions in Hawaii where employees can easily shift from one job to another and potentially spark a bidding war for their services, as a high-end headhunter recently explained to me.

But there is a land angle on salaries. The relative scarcity of office, retail and storage space in the islands means that companies that need a certain location will pay for it. There is fierce competition for choice spots, especially on Oahu and particularly in the heart of Honolulu. In the end, most companies pay high rents and leases because they don’t think they have a choice. When it comes to paying employees more, they often simply decide not to.

One clear indicator that land takes precedence over salaries is clear when you compare the rising value of real estate in recent years, or the last three decades, to median incomes. Put another way: How many people do you know who have received 5 percent average annual raises in Hawaii for the last 30 years — or the last five?

Businesses aren’t alone in making such calculations. Many employees in Hawaii, who grumble about their bosses for not raising salaries to compensate their work, use similar reasoning in their personal lives. They tend to swallow rent increases to the detriment of other aspects of their life because they have little choice if they want to stay in Hawaii. So they pay the going rent or purchase a home at market prices, and then they do their best to find a way to get by. This can involve going into debt to cover daily expenses, simply going without, or living with more people than they might ever have imagined.

View of upper Manoa homes. 9 dec 2014. photograph Cory Lum

While we are packed pretty densely into Honolulu, most of Oahu is protected from residential and commercial usage.

Cory Lum/Civil Beat

This goes a long way toward explaining why the American dream of owning a home is slipping away for Hawaii’s have-nots. And it helps to explain why the Organization for Economic Cooperation and Development, commonly known as the OECD, ranked Hawaii as the worst state to find a home

When it comes to home ownership, Hawaii is the third state from the bottom nationally, according to U.S. Census Bureau numbers for 2012, more than 10 percent below the national average. (This means that we have a smaller percentage of people who are profiting from the sharp recent rise in real estate values on Oahu.)

Most non-owners in Hawaii are excluded from buying a house anytime soon, and many others are struggling to cope with the rental market. Here is why: The real per capita income in 2013 was $29,577 — down 7 percent from the peak in 2008. That’s just $2,464.75 per month in income before taxes. In a state where the median monthly rent was $1,414 in 2014, it is clear that such people can’t afford to get by on their own. In many cases, even with roommates, given rents that are too damn high, they will struggle mightily. In Honolulu, where $1,800 is a fair-market rent, such people either need to obtain much of their food, clothing, telephone, transportation, insurance, schooling and other basic needs for close to free, or they need outside assistance.

And if the rent is often too much for such working people, buying a home is increasingly impossible for a growing number of residents who might reasonably consider themselves middle class.

At the end of 2013, a home at $650,000 in Honolulu was, by and large, a pretty good deal. At that time, the median household income was $65,087, which is less than $5,500 per month before taxes and other non-housing expenses. Someone buying a $650,000 house who is able to gather together a down payment of $130,000, should expect a monthly payment of at least $3,3000, according to various mortgage calculators. Most median income households can’t afford that. Even a median family would struggle to handle that with a collective income, in 2013, of $77,781.

And plenty of people who live in homes they own are under intense pressure. The median homeowner in Hawaii spent $2,287 on monthly mortgage in 2012, which is why the state had the highest percentage of live-in homeowners paying more than 35 percent of their household income for mortgage costs. That is a threshold, experts say, signaling such owners troubling economic vulnerability to health and job-related income shocks.

Limits on the Land-King?

If Hawaii decided to lower the cost of land, it almost certainly could, but it would mean shaking up the status quo.

Relatively low property taxes rates in Hawaii play a role in driving the cost of land up. Here’s how it works. People who are capable of gathering the down payment and who qualify for a loan have tended to, over time, benefit a great deal from their real estate investments in the islands. In theory, at least, if your property taxes are going up fast in Hawaii, it is because the value of your home is, too.

All reigns come to an end, one day. But many developers, construction workers, swaths of the tourism industry and members of the carpenters union are surely among those toasting the land-king’s health.

This favors investors who want to sell a home a great deal more than people who move into a home until their dying days. The latter pay, but someone else benefits from any subsequent sale.

Hawaii’s tax policymakers could change the rules. They could, for example, sharply increase property tax rates for off-island investors and ask less of families that live in the homes for many years.

Lawrence Boyd, an economist at the University of Hawaii at West Oahu, noted that the current system, in which someone in Ohio pays property tax rates that are several times higher than those in Hawaii, encourages outsiders to invest in land here. When enough off-island investors put their money in the island real estate market, it helps to boost prices.

A marked shift in Hawaii’s tax policy, Boyd argued, should make non-residents think twice before making potentially speculative purchases here, and it should benefit Hawaii residents. “Done in moderation, this would likely bring in additional revenue,” he said. And it might even slow the increase in rents. But taken to extremes, he warned, it could sharply lower real estate values and, ultimately, undermine tax receipts for the state.

Policymakers could move in a completely different direction, likely with greater and more immediate impact. Rather than messing with the market, they could liberate it by loosening regulations and facilitating permitting. The goal would be to facilitate construction on land in parts of Hawaii that are currently off limits, whether because they are preserved for environmental purposes or permitted solely for agriculture. This could create large amounts of additional housing and space for business, but it would involve sacrifices that many residents would likely reject.

And then there are the efforts to increase density in areas of Oahu where people already live, whether by encouraging homeowners and renters to have more people live on the same property, or by building higher into the air in the urban core of Honolulu.

In a way, those towers that are rising in Kakaako are concrete and glass testimonials to the power of our land-king.

All reigns come to an end one day. But for many people — developers, construction workers, swaths of the tourism industry, members of the carpenters union and others — are likely toasting to the health of Hawaii real estate.

Read our ongoing Living Hawaii series and join Civil Beat’s Facebook group on the cost of living in the islands to continue the conversation and discuss possible solutions.

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