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Residential real estate development in Hawaii has long been recognized as heavily regulated, and a new study concludes the level of regulation by far outranks all other states.
The study by the University of Hawaii Economic Research Organization suggests that regulatory factors including affordable-housing requirements, permit processing times and political zoning decisions stifle new home production to a degree in Hawaii that tops the nation.
UHERO’s study, released for publication today, also suggests that Hawaii’s regulatory environment for developing new housing could be adding roughly between 10% and 20% to home prices depending on the county.
“Setting rules for residential development can often be in the public interest,” the report said. “However, such rules come with lengthy permitting processes and other financial obstacles that create a disincentive for developers to build new homes. … Reducing the regulatory burden of housing construction could lower housing costs.”
UHERO conducted its study by having an official from each of Hawaii’s four county planning departments complete a survey designed by a team of economists at the University of Pennsylvania to quantify the stringency of local regulation surrounding new home production.
The University of Pennsylvania team surveyed around 2,500 local planning officials in 2006 and 2018 to produce its Wharton Residential Land Use Regulatory Index, though only Honolulu was included in 2006 and no Hawaii information was used in 2018.
UHERO gave the survey to the Hawaii planning officials last year, then compared the results with the Wharton data and found that among state averages, Hawaii had the highest regulatory environment, with an index value of 1.7.
The next highest value was about 1.1 for New Jersey. Twenty-two states had positive index values, meaning they had more regulatory barriers than the average. The other 28 states had below-average barriers. Alaska was the least restrictive, with a value of about -0.9.
By county in Hawaii, Honolulu had the lowest index value at 1.17, followed by Kauai at 1.35. UHERO said these two figures were in the top 10% of the roughly 2,500 local housing markets in the Wharton data.
Maui County’s figure was 1.52, putting it in the top 5% of the Wharton data.
Hawaii County had the highest index value in the state at 2.78, ranking it in the top 1%, though UHERO expressed caution over interpreting differences across the four counties because one person was responsible for each county’s response to the survey.
UHERO also looked at home prices and regulatory index values by market, and found a significant correlation that suggests an index level of 1 correlates with an 8% higher home price.
With Hawaii’s index value of 1.7, this could amount to almost a 14% price impact, or $140,000 on a $1 million home that represents a mid-priced, single-family residence on Oahu, Maui or Kauai.
However, UHERO said this correlation between regulatory stringency and housing prices does not show that more stringency causes higher prices.
“It doesn’t prove that the regulation is causing home prices to go up,” said Carl Bonham, UHERO’s director and one of the report’s authors. “It’s a correlation. It doesn’t necessarily show causation.”
Generally, Hawaii’s housing prices have been pushed up because demand has been considerably stronger than supply. If less regulation allowed more supply to be produced, then some upward pressure on prices could ease.
UHERO said in its report that several areas of regulation in Hawaii are a lot higher than the national average. For instance, the level of political involvement by state officials in Hawaii ranks in the top half of the Wharton data while political pressures at the local or county level in Hawaii rank in the top 5%.
Court involvement in Hawaii is in the top 25% of the Wharton data, according to UHERO’s report.
Other heavy regulatory factors cited by UHERO are permitting wait times in Hawaii being roughly triple the national average, and affordable-housing requirements for new housing project construction being nearly seven times higher in Hawaii than the national average in the Wharton data.
UHERO said reforming or removing regulatory barriers to new housing production could significantly increase construction and reduce costs. One suggestion it offered is to allow more dense development in some areas.
“Easing the regulatory burden of housing construction could lower housing costs by removing a barrier to new supply,” the report said.
HOUSING RULES
States with the most/least stringent regulatory environments for residential development:
MOST STRINGENT
>> Hawaii
>> New Jersey
>> Maryland
>> Rhode Island
>> California
LEAST STRINGENT
>> North Dakota
>> Arkansas
>> Iowa
>> Alabama
>> Alaska
Source: University of Hawaii Economic Research Organization
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