For aspiring homeowners, housing prices on Oahu just seem to keep rising up, up and away.

The question is why. Or, more precisely: What’s the driving force behind high prices that lead many homeowners to mortgage too much of their future and that prevent so many local renters from ever owning a home?

University of Hawaii economist Sumner La Croix looked at 55 years of real estate data for Honolulu to find an answer. His conclusion: Increasingly, it is about the land beneath our homes. La Croix calculated that an average of 65 percent to 75 percent of the cost of a common home in Honolulu is based on the price of the land it sits on.

Yes, two-thirds or more of the price of your home is likely the land.

The majority of the cost of homes in Honolulu is related to the value of land beneath them.
A substantial portion of the cost of homes in Honolulu is related to the value of land beneath them. Eric Pape/Civil Beat

La Croix drew his conclusions from an analytical model designed by Morris Davis, a professor of finance at Rutgers University, and Jon Heathcote, who is now a monetary adviser at the Federal Reserve Bank of Minneapolis. Their model calculates how much of home values in a given market can be attributed to the value of residential land versus other costs, such as construction.

At a time when Mayor Kirk Caldwell is calling for generating more housing units that locals can afford, La Croix’s analysis and conclusions may prove instructive — especially to policymakers looking to make housing more accessible to Hawaii’s middle class.

Developer and affordable-housing advocate Chuck Wathen said that La Croix’s numbers jibe with his own examinations of housing costs in Honolulu. It’s a good thing that an expert is nailing them down, he said.

“This gets at the crux of the problem in affordable housing, the cost of entitled land,” said Wathen. “We have a scarcity of entitled land, which is what is going up the fastest; entitled land with infrastructure is going up faster than the total home value.”

Any effort to create significantly more affordable middle-class housing needs to take that into account, he said.

The Long View

Honolulu has a long history of expensive land and housing prices — just not this expensive, according to La Croix.

In 1960, the median home in Honolulu cost about double the typical mainland home, he said in a Nov. 10 presentation at the Houseless in Honolulu summit at the Dole Cannery.

Now, 55 years later, new home-buyers on Oahu pay more than three times the national median home value.

At the start of the summer, Honolulu was essentially tied for the third most expensive single-family home market in the nation, according the National Association of Realtors. Two iconic cities for tech wealth topped the list: San Jose, where the median home is selling for $980,000, and San Francisco, where a typical home costs $841,600. Honolulu and the Santa Ana-Anaheim area of southern California came in neck and neck at just below $700,000 — although Oahu’s median home price has since jumped to $730,000.

No other metropolitan area in the country is even close. The median price for a single-family home in the Los Angeles-Long Beach area, for example, was about $435,000; that’s the asking price of this 790-square foot 1-bedroom apartment in Hawaii Kai.

Expensive Since Statehood

At the Houseless in Honolulu summit, Mayor Caldwell tried to encourage local developers to build more inexpensive rentals and homes that target the incomes of middle class residents.

In his talk, the mayor, who was born in 1952, noted that the islands have had high real estate prices at least since he was a kid growing up in Hilo. Caldwell recalled looking at the newspaper as a young child and seeing homes for sale at prices so high that they still stick with him.

“I didn’t know where Kahala was, but I went, ‘Wow, $350,000 for a house in Kahala, when one in Hilo was like $27,000!’”

“I didn’t know where Kahala was, but I went, ‘Wow, $350,000 for a house in Kahala, when one in Hilo was like $27,000!’” — Honolulu Mayor Kirk Caldwell

Affordability, the mayor said, “has been an issue forever here, because everything that we use to build comes from somewhere else and our land is scarce.”

Lack of land hindered housing affordability even during the economic boom that accompanied statehood.

The late 1950s and early 1960s brought a surge in tourism, thanks to the first passenger jet flights to Hawaii, along with a surge in infrastructure investment, according to La Croix.

Some of those visitors eventually moved here. Since 1950, the state’s population has nearly tripled. Even now, the state continues to add thousands of new residents each year — and they compete for the increasingly expensive and limited housing stock.

In 1960, La Croix found, the price of land made up a little more than one-third of the price of the typical home in Honolulu, but it has climbed fitfully but remorselessly since.

From then until now, the share of the pure land cost has risen to about two-thirds of the overall cost of a home. Even though the cost of construction has increased too, its share of the cost of homes has almost certainly declined, he found.

Nationally, land’s share of overall housing values has increased, but far less than on Oahu. As recently as 2006, the last peak real estate period before the current one, land’s share in prices reached 46 percent, climbing 11 percentage points over the previous 31 years.

But La Croix found that growth rates tended to increase much faster in desirable coastal cities, where residential land supply tends to be smaller, and much slower in most other places.

In Honolulu, according to La Croix, the population is packed into the smallest natural supply of land of any U.S. metropolitan area. Policy decisions as well as geography, he said, have limited Honolulu’s ability to enlarge its urban footprint.

In many non-coastal U.S. cities, such as Detroit and Saint Louis, the prices of homes remains mostly a function of the cost of actually building them.

In Honolulu, by contrast, construction and other non-land costs are less important than the limited amount of residential land, regulation on land development and the appealing array of amenities that Hawaii offers to newcomers — remarkable nature, mild weather and the spirit of aloha, LaCroix said.

Honolulu also tops the list of cities with the smallest percentage of land that can be developed, according to an array of experts.

The end result, La Croix said in an interview, is that, “We are susceptible to shocks.” When there are positive shocks, like a surge in demand for housing, prices tend to go up, up and away.

Read our ongoing report on Hawaii’s high cost of living and the search for what can be done about it.

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