Why Does Everything Cost So Much in Hawaii?
Price of Paradise · Hawaii Public Radio · aired 1993-08-01
Guests: Leroy Laney (Chief Economist, First Hawaiian Bank); Michael Sklarz (Senior Vice President and Director of Research, Locations Inc.)
Duration: 00:26:38

[00:00:01] Randall Roth: Good morning. I'm Randy Roth, host of the Price of Paradise radio show. With me today are Leroy Laney, Chief Economist at First Hawaiian Bank, and Michael Sclar, Senior Vice President and Director of Research at Locations Inc. Leroy, before you tell us why the cost of living in Hawaii is so high, can you give us some idea as to how it compares to places on the mainland?

[00:00:22] Leroy Laney: Randy, the numbers, if you if you go back over let's say 20 years or so, uh you'll you'll find that it's always cost more to live in Hawaii than it has on the mainland or on average uh compared to the US mainland. 1970, uh an average uh family of four on Oahu uh required about 20% more in their household budget to live here. Uh as late as 1986, that number had increased, but it had only gone up to about 23%. Uh in 1990, however, the number had increased to an astounding 34%. Now, we can talk about what happened in that period of time. Uh there was a tremendous inflation. Housing was the main reason that that uh prices did go up or the cost of living here did go up.

[00:00:58] Leroy Laney: It's always been high and it's gotten worse.

[00:01:10] Randall Roth: Now, I assume that's against some mainland average. How do we compare against specific cities like San Francisco or Boston or some other large city?

[00:01:18] Leroy Laney: Well, if you take [unintelligible — audio glitch] California cities or or Washington, D.C., New York or or some of the cities on the East Coast too, uh it's not quite as bad, but it but if you look at housing, housing is is a good bit higher here than than elsewhere. Food uh is going to be higher here uh than uh practically anywhere.

[00:01:36] Randall Roth: I'm sure there are lots of reasons why it's so high. Can you begin to give us a list of why the cost of living in Hawaii is as high as it is?

[00:01:44] Leroy Laney: Well, there's as you know, there there as you say, there are a number of reasons why that is and and there's not any single reason that that really stands out. Uh if we take something like uh food or other retail items for example, you've got to remember that most firms here require uh much larger inventories or at least they carry much larger inventories, sometimes two to three times the number of the the amount of an inventory uh that's required on the mainland because we can't just readily get those things from you can't readily get a a back order a part or a food item that a supermarket is expected to stock. Uh so the cost of financing those inventories and warehousing them obviously enters in.

[00:02:18] Leroy Laney: Um transportation is something that people single out frequently. Transportation does has something to do with it but not nearly as much as a lot of people think.

[00:02:33] Randall Roth: How much does it have to do with the cost of living in Hawaii?

[00:02:36] Leroy Laney: Well, I think probably less than I I can't put a specific number on it, but it would be uh in the range of maybe uh the low double digits or or maybe single digit range. It's not something, obviously that would vary with whatever you're talking about, whether it's a bulky item to ship, or whether it's something that's easy to ship. But that that's not um that that's sort of uh a red herring. That's not really the biggest reason. Um you got to mention uh the excise tax here. 4% uh greater than 4% excise tax.

[00:03:08] Randall Roth: 4% doesn't sound too bad.

[00:03:10] Leroy Laney: Well, it's compounded over that's every transaction in the chain so it's going to be compounded there too. And uh that's something that that I think adds significantly to it.

[00:03:19] Randall Roth: Is that the the single biggest factor or is there any one factor that stands out in your mind as explaining that that high differential from the mainland?

[00:03:27] Leroy Laney: I think that probably the excise tax is is a big factor in in a lot of retail items. Now again, I I'm hesitant to put a specific number on that. I mean, you can't just divide up the pie of 100% and say that's the item because it's it's hard to generalize across items. One thing I think though that we haven't mentioned is the fact that uh in general, I think that the business community here and the retailing community, uh there is a tendency not to compete on the basis of price quite as much as there is other places. Um I'm not talking about economic efficiency here so much as as non-price competition. I do think that some of the recent uh innovations that we've had in in retailing, uh food and some other items, the Costcos and the Sams clubs and that kind of thing, will have the impact of introducing greater price competition into the marketplace and lower inventories for that matter because they don't they don't stock as they're not required to keep those same items on the shelf all the time.

[00:04:03] Leroy Laney: So that's that's an item.

[00:04:25] Randall Roth: I'm sure this is a a show by itself, but will those large discounters run the mom-and-pop operations out of business?

[00:04:31] Leroy Laney: I do think that there will be some impact. I don't think that they're going to run all of them out of business. I I think that it will it it will be healthy in the sense that it introduces more price competition here. Uh there will [unintelligible — audio glitch] less efficient of uh I don't know what all of them will be mom-and-pop businesses. There may be some larger people that are impacted, but I I think that there will be some some repercussions of that, yes.

[00:04:53] Randall Roth: Okay. Michael, Leroy has given us the beginning at least of a pretty long list. At least I have the feeling it's going to be a long list. Do you have a a few favorite explanations as to why the cost of living is so high to add to this list?

[00:05:05] Michael Sklarz: Well, I think Leroy touched on housing, and of course, that's a significant part of any household budget. And uh our housing prices are of course, uh statistically the highest in the country. I think our median single-family home price for example, at say $350,000 or so, is is uh at least uh 50% higher than uh our typical West Coast city and in about three and a half times the nationwide median. Uh also our rents are uh very high and and compared to other major cities we're probably a good 25 to 50% higher there as well for typical apartments. So uh I think that's probably a pretty good uh segment of um our high home price, our high uh living costs, our housing. And and that's not a problem that's going to go away easily.

[00:05:41] Michael Sklarz: 

[00:05:50] Randall Roth: Is that because it costs a lot of money to build a house uh here in Hawaii or is there more to it than that?

[00:05:55] Michael Sklarz: Well, I I think the the it really begins with high land prices because that really provides the floor under which uh any new housing development or or rental apartment complex reverber begins. And and with very high land prices, it's very difficult for a developer to deliver a housing unit at at a reasonable price. So uh it really starts there. The construction cost costs are higher than on the mainland. I don't know exactly how much, it's probably something in the order of 20% or so, and labor costs I'm sure are higher here, but I think the real culprit is high land prices.

[00:06:28] Randall Roth: I'd like to hear each of you tell me why you think those land prices are so high.

[00:06:34] Michael Sklarz: You want me to uh jump in there, Randy? I have them.

[00:06:37] Leroy Laney: Well, um geography, of course, is the thing that most people mention first. We've got a scarce amount of land. Uh we have got uh of that land that we have available, not all of it is is uh developable in the sense that we can't build houses on it. Uh but more than that, I think that the control of the land, it's concentrated in in ownership. Basically, it's owned uh a lot of it is owned by the state, a lot of it is owned by uh various estates, and uh that has a lot to do with it. It's that that kind of concentrated ownership does not make it a normal market that we like to analyze as economists and talk about atomistic operators in the market.

[00:07:06] Leroy Laney: 

[00:07:15] Randall Roth: Does that mean because there's relatively few owners of land that they can somehow um conspire or somehow set the price of land?

[00:07:23] Leroy Laney: Well, I don't think that it's anything that in an anti-trust sense you would say is collusion. Uh it's it's not that kind of thing but it's it's similar in a sense to what we were talking about before with respect to uh prices in retailing. This is a relatively small market, and it's not that hard [unintelligible — audio glitch] have an oligopoly operating in the market so that prices are not, you know, you've got a price leader and you've got followers that that can can uh look at that price. You know, if if you try to say, well, it's the state's fault for making it hard to uh reclassify land from agricultural land to uh urban land to develop it, uh or it's the county's fault they get into the process sometimes too.

[00:07:50] Leroy Laney: Or it's the estate's fault for for uh keeping the price too high, or or uh it's uh, you know, we also, because this is a very beautiful place, have an an uh a larger environmental uh lobby than a lot of places. So that gets into the process or at least uh the the anti-development attitude here can derive some moral support from people that don't want to see growth. You see that, I think especially on the neighbor islands, where they don't want to extend an airport runway or they don't want to build another hotel because it will just simply mean uh quote economic growth, and economic growth to them is a bad thing. Um one factor I think that's not mentioned uh with housing, and I I think Mike would agree with this.

[00:08:42] Leroy Laney: This is something that uh Tony Downs, who uh Locations invites out every year, has pointed out, at least every time that I've been to see him. He has made a a statement uh frequently that I think a lot of people don't think about, but if if you look at uh who would lose if we had a much greater supply of housing here. The class that a lot of people don't think about are are the uh those strange bedfellows that I was just going down the list of. Um I think existing homeowners probably have got a lot to do with it, because if you think about the the negative wealth effect of somebody who has sacrificed and borrowed money perhaps from relatives and who now has uh that single asset that's the largest asset in their portfolio, they want it to go up in price as much as possible, or at least they don't want it to go down in price.

[00:09:12] Leroy Laney: And of course, what would happen is that that uh if if you had um an unfettered development policy here, uh then existing homeowners would lose on the price of that. So I think you, I'm not saying that's the one cause. I don't think any of those are the one cause, but I do think that that you have to take all those things into account and sometimes the the invisible cement it seems to hold it together would be [unintelligible — audio glitch] people that are in the housing market relative to those who are not.

[00:09:56] Randall Roth: So you're saying as a as a homeowner that perhaps I'm uh a part of this uh group that has a vested interest in keeping that land expensive.

[00:10:05] Leroy Laney: I think that if you if you analyze it and you think about it and you think of yourself as homeoeconomicus uh who who responds to uh uh maximizing your own income and your own wealth, I think that you have to you have to say that. Yes.

[00:10:17] Randall Roth: I try not to think of myself in those terms. But uh Michael, what do you think? Why is why is this land so high?

[00:10:20] Michael Sklarz: Well, I think that Leroy touched an interesting uh uh angle or perspective which of course is the financial side of it. But I I think if nothing else, there's just the quality of life side of it and this not not in my backyard syndrome of existing homeowners who live in a certain neighborhood and and say have a views of uh mountains or the ocean or whatever and and then a developer comes along and says I'd like to build a new subdivision and their first thought is it's going to make it more congested here. The traffic's already bad enough and and you're going to take my views away and and I'd rather you didn't and go somewhere else and and that developer then kind of gets buffeted from neighborhood to neighborhood and in the end not ultimately with nothing getting built and that seems to be a fairly typical uh scenario for a lot of our problems in terms of getting housing developed here.

[00:10:45] Michael Sklarz: 

[00:11:03] Leroy Laney: That's right, and and here of course there are fewer places to go than in Arizona or West Texas or some place where houses are are a lot cheaper than they are anywhere like Hawaii.

[00:11:14] Michael Sklarz: So so it's almost uh I know Tony Downs, the the that Leroy mentioned Tony, has mentioned this in the past, [unintelligible — audio glitch] sort of an ironic syndrome where the more popular area, it almost feeds on itself and keep in terms of keeping uh housing prices high. And the least popular areas say it's Oklahoma or Texas or somewhere where the um lots of land and so on, um that encourages more development and that in and of itself keeps home prices lower. So so the two feed on himself both on the upside and the downside.

[00:11:41] Randall Roth: You're listening to the Price of Paradise radio show. I'm Randy Roth, and my guests are Leroy Laney, Chief Economist at First Hawaiian Bank, and Michael Sclar, Director of Research for Locations Inc. What about government in all of this? Um I'm under the impression that at least in some sense, government is in competition with private developers. Government is out there building housing. Is that true? And if so, is it good or bad? Michael, what do you think?

[00:12:07] Michael Sklarz: Well, government uh I think has been frustrated in in recent years in particular in terms of the the insufficient amount of new housing and has tried to jump in [unintelligible — audio glitch] um presume to accelerate the process. The the only problem has been um uh requiring developers to build affordable units or mandating that saying, okay, fine, we're going to help you through this honorous permitting process and land use process and so on. But if we do give you the zoning to go ahead and build, then we demand that you build some percentage of the units that are in low price ranges so that uh we can appeal to the the first-time buyer or the or the affordable so-called affordable buyer.

[00:12:32] Michael Sklarz: So the intent may be good, but unfortunately that that economically doesn't really make a whole lot of sense and it may have may work at times but uh it's it's just a form of of transferring wealth from people who buy the market-priced homes to the people who are buying the affordably priced homes. So, I I think that's being rethought uh particularly in the past year as fewer and fewer developers are stepping forwards, willing to get involved in those kinds of new developments. Where uh government has uh played the um I think a a important role is in rental housing, and that's a whole other issue I think we haven't really touched upon. But um one of the reasons we have such low vacancy rates and high rents is that it hasn't been economic to build rental housing here in Hawaii for many, many years.

[00:13:16] Michael Sklarz: In fact, there's been virtually no new private rental projects, uh say for example on Oahu for more than 20 years.

[00:13:32] Randall Roth: Why is that?

[00:13:33] Michael Sklarz: Well, I think it's back to those high land prices that uh given the high land price and then and then the high delivery price for a typical unit, as high as our rents are, they still do not pencil out in terms of the cost of of um buying the land and developing the project. And so, uh [unintelligible — audio glitch] there's it's not economically viable for a developer to just go out and and build a rental project and try to make it work based on the on the rental proceeds. So he's been forced to sell the units and and set up uh to to investors who then in turn around and either um, well, either homeowners or investors. And the if it's investors, then they turn out and be the the tenant, the landlords I should say.

[00:13:59] Michael Sklarz: But um uh so in recent years, the government has stepped in and and actually built uh rental projects. We've seen a number in Kaka'ako, for example. And they of course have the benefit of being able to acquire the land at a much cheaper price, or this may be land that they already own. They can borrow uh at municipal uh bond financing rates, and of course they don't need to make a profit like a private developer would. So all those um factors have enabled them to deliver rental units at uh at a price that uh likely can work out economically unlike what a private developer is confronted with.

[00:14:45] Randall Roth: Is that good?

[00:14:47] Michael Sklarz: I think for that segment of the market it probably is uh at least given until until we rethink our land use policies. Um, at least it's solving some of the immediate problems uh of delivering rental housing.

[00:14:58] Randall Roth: So when you say for that segment of the market, you're saying you support government building uh rental housing but not housing that's going to be purchased at affordable prices.

[00:15:07] Michael Sklarz: Owner-occupied, that's right.

[00:15:08] Randall Roth: I see. Leroy, you agree with that?

[00:15:09] Leroy Laney: I think the cross-subsidy there in in the owner-occupied housing is is the main problem and I I think that there the efficient solution would be to to get government out of the uh of the development process.

[00:15:21] Randall Roth: And by cross-subsidy you mean the people who are paying market are paying more so the others can pay less.

[00:15:26] Leroy Laney: Absolutely. So the others can pay less. Right, the developers got to make all of his profit on the market priced housing, and uh it's it's just extremely difficult to do that, and and I think that it would be more efficient in terms of housing supply and developers that are that are out there trying to do that, uh if we didn't have that situation.

[00:15:42] Randall Roth: How long does it take to get permission, whether it's a permit or a change in zoning or whatever it might be, from when a person buys land to when they can actually develop it? How long are we talking about moving through the red tape?

[00:15:55] Leroy Laney: There is no single answer to that, but I think the only reasonable answer is a long, long time, uh too long. Uh, there are examples of some commercial projects which are probably not the best example but uh, you know, it could take 10 years.

[00:16:09] Randall Roth: Why do you say too long when when there are environmental groups and others with genuine concerns that need to be heard? Why is it too long?

[00:16:16] Leroy Laney: Well, in in economics, there are always trade-offs between uh that environment [unintelligible — audio glitch] an extent from an environmental standpoint, we're polluting something just by simply being here. We don't have to drive cars that uh uh have uh emission uh uh that don't have mission controls and pollute the environment. We don't have to have a house that uh ruins an otherwise uh beautiful hillside. Uh, those kinds of things always exist, but I think that if if you take into account the positive uh contributions to one standard of living from the the economic growth and the development that does occur, uh it it pencils out that it that it's a good thing for society in general.

[00:16:41] Leroy Laney: If we didn't have those sorts of things, uh now, if somebody really uh is is a dyed-in-the-wool environmentalist, they don't want that kind of thing, maybe they would be heard by it. But I I think people do tend to underestimate the extent to which those kinds of things from growth and development do contribute to a higher standard of living over time.

[00:17:15] Randall Roth: Are there any other factors that haven't been mentioned yet that help explain why the cost of living is so high in Hawaii? Anything come to mind?

[00:17:23] Leroy Laney: One thing that I neglected to mention earlier and you mentioned government, and I thought about it, but uh the level of income taxes, uh state and federal income taxes here combined uh is is another big contribution to it.

[00:17:37] Randall Roth: Is there some reason why taxes are particularly high in in Hawaii? Something that would go to the fact that we're out in the middle of the Pacific or that we're uh a small state or anything else that would explain that?

[00:17:47] Leroy Laney: Well, I suppose you could make an argument that there might be some um economies of scale or lack of economies of scale that we've got to have uh some things in a government infrastructure here that a state of California [unintelligible — audio glitch] uh Texas or Illinois, in New York, or whatever could spread over a larger population base and and you wouldn't have to have that. But I I don't think that fully explains it. I think that we do have a a level of government here in the state that is overextended. I know you've had uh previous uh uh discussions of that on this radio show, but uh we're probably not getting our money's worth there and and uh it probably extends beyond the bounds of government's role as we typically conceive it in economics, which is to patch an externality.

[00:18:13] Leroy Laney: That is something that the private market can't provide or won't provide for some reason, uh then government steps in and provides it. And I think most people, unless you're a died-in-the-world libertarian, would argue that there are some things like that that government should do. But I think that we've gone well beyond that here, and I think that the government is into some things that uh we don't need to be in. Very egregious example of that is what we just talked about, housing. It's probably one of the best examples of it, maybe the best. Um but I I think that that um that paternal some more that that uh um over extended role of government is one of the reasons why the the uh the tax base here is is as high as it is, and the tax burden here is as high as it is.

[00:19:00] Leroy Laney: 

[00:19:10] Randall Roth: I see. Michael, let's pretend for a minute that you've got total control over everything political in in Hawaii. You're the governor and the legislature combined and you would like to bring down the high cost of living in Hawaii. What's the first thing that you would do?

[00:19:27] Michael Sklarz: Well, I I think following Leroy's point, uh better rationalize government. So, uh I I think the 1980s witnessed a tremendous rationalization and in private business, uh major corporations throughout the country. The only only entity that that experienced dramatic growth was government. This wasn't wasn't only in Hawaii, but uh the country as a whole. So I think uh, you know, government really needs to run more efficiently and rationalize itself, and and that hopefully would translate to lower taxes and uh and more efficient production. Um, with regard to housing, I I think that uh, if we can think of ways to uh free up more lands and and encourage developers and to build not only uh owner occupied units but rental units. And um, and of course that's that's not a easier said than done, but I think there's a lot of developers out there that really are willing to do this and capable of doing it.

[00:19:58] Michael Sklarz: I think that there's probably the image that every developer out there is greedy and is looking to, you know, build luxury condos and sell them to the Japanese and that type of thing. Um, maybe a convenient image, but but the reality is is there's a lot of uh, good developers who it's hard to turn the right place and they really would like to build uh owner-occupied housing for local residents at all price ranges. And if we could just make their lives easier, I think we could uh really make a dent into our uh our housing costs. The the market does work in housing just like it does in in uh in any other sector of the economy. And and if we increase supply, uh we're going to see uh prices stabilize.

[00:20:39] Michael Sklarz: In the 1970s, we went through an extended period of of virtually flat rents and and flat home prices in the early and mid 70s when we built many, many new units. And and that was proof that the that economics does work where supply and demand does work. So uh, you know, if we could just somehow think of a way to get back to that type of a uh environment again.

[00:21:16] Randall Roth: Michael, how does it affect those developers to to hear the politicians talking seriously about rent control? Is that something that that they don't worry about, or is is that something they factor into their decision to build or not build in this case?

[00:21:27] Michael Sklarz: Well, it's just another deterrent for them to do a rental project. And and that's the last thing in the world we need right now. We're having a hard time getting any private developer interested in doing rentals. And if you then say uh if you build rentals at some point in the time point of time in the future, you're going to be restricted in terms of how much you can raise those rentals. Uh he's not going to be interested. You know, capital is going to flow to wherever it's best treated. And and anytime government gets involved, generally uh it's uh capital is going to flow elsewhere.

[00:21:55] Randall Roth: Let's assume for a minute that that government somehow figures out a way to bring down the cost of living in Hawaii, the the price of paradise is reduced. What's going to happen? Leroy, I know you wrote some things in the price of paradise about this. What do you think?

[00:22:10] Leroy Laney: Well, I you know, it it's it's rather ironic, I think that um, economists generally embrace prices as a way to ration a scarce resource. And I I know that that's the way I ended my chapter in the price of paradise. I said, yes, it's it's high. Most people, if you put it to a vote, would say that it's too high. Higher prices here, however, do uh ration that price to the ration that resource to those who are willing to pay the price. Uh, I do think that it will retard economic growth here, beyond a point that I think a lot of people would say is is a good thing. Um, prices are probably [unintelligible — audio glitch] price of and we talked about land primarily and and uh how that is choking off development here. Uh, you know, there there is something um in economic life that that doesn't love a price too high. Um, if I can paraphrase Robert Frost, if something there is that doesn't love a wall.

[00:22:45] Leroy Laney: Uh, the um, there are a lot of examples of that in recent economic history. I mean there were, if you remember back in the 1970s, all prices were too high and they were being held too high by the OPEC cartel, and people were saying that price is too high. It's too high. Uh it's by by most people's judgment. It's not not high, and I'm willing to pay the price because most people were still putting gas in their cars, but it's too high. But people were saying, yes, but it's not going to fall. It's too high. It's not, but it's not going to fall because the OPEC cartel is going to hold together. Milton Friedman was saying at the time, watch this because history is shown that cartels are unstable and they'll fall apart. Turned out that eventually after about a decade and a half that Milton was right. Prices did come down.

[00:23:27] Leroy Laney: 

[00:23:46] Randall Roth: He was laughed at at the time, if I recall.

[00:23:48] Leroy Laney: Absolutely, he was. And but people were saying, well, you know, the the lower absorbing nations of the Persian Gulf will hold together and there won't be um a um any breakdown of the cartel. That tended to work for a while, but the price was too high and what happened to that high price is it came down.

[00:24:03] Randall Roth: Are you suggesting the prices in Hawaii are going to come down because they're too high?

[00:24:06] Leroy Laney: I'm I'm suggesting that you should never rule out that possibility. I'm not going to predict that they're going to come down, but I should I should say that anytime somebody tells you that price is too high, but it's not going to come down.

[00:24:18] Randall Roth: Watch out. Watch out, because another example would be, I think more recently, would be the um, uh, the Japanese stock market. Oh, with that provocative note, uh, we'll have to end. Thank you, gentlemen. Our guest this week were Leroy Laney, chief economist at First Hawaiian Bank, and Michael Sclars, director of research for Locations Inc. For information about future programs, send a self-addressed stamped envelope to Hawaii Public Radio, 738 Kaha Street 96814. That's Hawaii Public Radio, 738 Kaha Street 96814. We also would like to hear your thoughts about what we've said and not said. Your comments can be sent to Hawaii Public Radio or faxed to me at 956-6402. You've been listening to The Price of Paradise Radio Show. I'm Randy Roth. Aloha.

[00:25:02] Randall Roth: 

[00:25:10] Announcer: This program is produced by the Consortium of Price of Paradise authors in cooperation with Hawaii Public Radio. The Price of Paradise is of interest for every concerned citizen of Hawaii. It is available in local bookstores and in public libraries. Please tune in next week when Randall Roth, one of his 37 co-authors and a special guest will take on another question of importance to listeners in Hawaii. Cassette copies of this program are available from Hawaii Public Radio for $10 by calling 955-8821.