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‘Tokyo model’ could be best housing path for Hawaii

The answer to Hawaii’s affordable housing problem might be in Tokyo, according Edward Pinto, Keli’i Akina’s guest on the latest “Hawaii Together” program on ThinkTech Hawaii.

Pinto is senior fellow and director at the American Enterprise Institute Housing Center in Washington, D.C., and he talked with Akina on the Feb. 28, 2022, episode of the show about potential solutions to Hawaii’s high cost of housing and its housing shortage.

According to Pinto, land-use regulations artificially force land costs upward, which in turn forces up housing prices. He said Tokyo’s recent history shows that deregulation of housing development, rather than more government management, can help communities keep up with housing demand. So if Hawaii wants more housing, Pinto said, it might want to follow Tokyo’s example.

Pinto said areas on Oahu that could be opened for more intensive development and redevelopment include the high-priced land around the H-1 freeway, much of which is still zoned residential. Opening up that land, he said, could add 26,000 housing units over a 10-year period.

Other highlights from the episode include:

>> There are many similarities between the housing situations in California and Hawaii, Pinto said. But California, after trying all other options, is now embracing the free market and property rights.

“If California has recognized that they need to allow the private sector and property rights to operate,” Pinto said, “it’s time for Hawaii and Honolulu to do the same,”

>> Akina, who also is president of the Grassroot Institute of Hawaii, said it is often assumed that housing in Hawaii is expensive because land is scarce. But, the truth is, he said, “we actually develop on only 5% of the landmass, leaving 95% undeveloped.”

Pinto said that if Hawaii could increase the amount of land available for housing to 7%, that would drive down home prices in Hawaii tremendously. 

To see the entire presentation, click on the video below. A complete transcript is provided.

2-28-22 Edward Pinto with Keli‘i Akina on “Hawaii Together”

Keli’i Akina: Aloha, everyone, and welcome to “Hawaii Together” on the ThinkTech Hawaii broadcast network. I’m your host, Keli’i Akina, president of the Grassroot Institute of Hawaii. 

We live in paradise, but there’s the other side of paradise: the fact that so few of our residents are able to afford housing. There’s no lack of solutions that are offered, but not all of them will really work. 

One of the solutions that our county and state officials are looking at happens to be a program based upon Singapore’s model of housing, in which the government itself owns the land and the building, and leases out apartments to residents. That may be a short-term fix, but in the long run, we think there are some serious problems with it. 

But we don’t want to be naysayers. At the Grassroot Institute, we want to come up with solutions that will work. So we scour the country and the world for those solutions. 

One such solution may very well come from Tokyo. The highly populated city has shown that deregulation, rather than more government management, can help communities keep up with the housing demand. If Hawaii wants more housing, it may wish to follow Tokyo’s example and roll back regulations on land use and housing development.

My guest today is an expert in this subject matter. He’s senior fellow and director at the American Enterprise Institute Housing Center in Washington, D.C. His name is Edward Pinto, and I’m so glad that he’s joining us today to give us a bit of his expertise. 

Ed, welcome to the program.

Edward Pinto: Aloha, and thank you for having me.

Akina: Well, Ed, I can’t wait until you fly out here to Hawaii and we don’t have to do this on Zoom. How does that sound?

Pinto: We’re planning on doing that.

Akina: That sounds great. Tell me a little bit about your background in the subject matter, and why you have an interest in what we call the Tokyo model.

Pinto: I’ve been involved in housing finance literally my entire career. Even before I graduated law school I was involved in housing a bit. I was involved in it at law school, and then my first job was in working for the state housing finance agency as an attorney and in affordable housing. That’s been my entire career. 

I was the chief credit officer and executive vice president at Fannie Mae back in the 1980s. For the last 14 years, I’ve been a senior fellow at the American Enterprise Institute, and I founded the Housing Center back in 2013. The purpose of the Housing Center is to study housing markets in the United States in a data-based and research-based way.

We’ve assembled what we believe is the best dataset in the entire country about the United States, including all 50 states. We use those data to come up with solutions. We call it “Data yields information, information yields knowledge and knowledge yields potential action.” We do a lot of research. We’ve looked at Tokyo and many other situations that might be applicable and useful to Hawaii.

Akina: Well, I like your emphasis on data because we can’t simply have an ideology or a philosophy; we really have to look at the world as it is in order to find causes to the problems and solutions. 

One of the things at the Grassroot Institute that we have recognized for quite a while is that many people are leaving Hawaii because of the high cost of living. The most significant component of that is the high cost of housing. For those who remain in the state, there’s a high population of residents who don’t own their home and don’t have security in terms of long-term residency.

You’ve looked at the states across the nation. As you look at Hawaii, what do you think are some of the causes or perhaps even the chief cause of the high cost of housing?

Pinto: First of all, as you say, Hawaii does have a high cost. We looked at out of all the states, Hawaii has the highest median home income, the second highest median rents, [and] the second highest rate of homelessness per capita. On a national basis, it is extraordinarily high from a price-to-immediate-income basis. 

Out of 92 international markets, Honolulu is number 86. It ranks just behind San Francisco and San Jose, and is ahead of London and San Diego, in terms of being one of the most expensive international destinations.

What we think basically creates this problem and it’s a very similar problem that California has, and many of the cities that are similarly ranked to Honolulu are in California, and there’s a reason for that — California and Honolulu followed similar patterns, which was to put in land-use restrictions, zoning, land-containment zones, other restrictions on types of structures, restrictions on density beyond zoning, restrictions on building codes, etc., that have been present in California from the ’50s and ’60s, and in Honolulu and Hawaii since the early 1970s.

We see a very similar pattern between California and Honolulu and Hawaii. What’s interesting about California … and a colleague of mine, the assistant director at the Housing Center, Tobias Peter, and I wrote an op-ed a couple of weeks ago in The Wall Street Journal, where we pointed out that after trying all the other options, the state of California is now finally embracing the free market and property rights. 

They did that [in] two ways. One is, over a period of years, they greatly expanded the ability to build accessory dwelling units, which are now burgeoning throughout much of California, particularly Los Angeles and San Francisco.

Secondly, just late last year, they legalized the building of a second unit, which could be either a second single unit or a duplex, two-family and lot-splitting of individual lots throughout about 80% of California. That took effect just on January 1st of this year. 

If California has recognized that they need to allow the private sector and property rights to operate, it’s time for Hawaii and Honolulu to do the same.

Akina: Well, Ed, that’s very interesting. In my own opinion, I’m not so certain as to how much California as a state, or state government, is acknowledging the philosophy of property rights and principles of individual property ownership, but they’ve been pushed there, at the very least. What California had been doing just wasn’t working, and so pragmatic solutions are necessary. 

Just to go back a bit, you said such interesting things about the role government plays in interfering with housing availability. Talking about the Hawaii situation, would you say that government regulation is a big part of reducing the supply of housing, which leads to its high cost?

Pinto: Absolutely. We found some data that show that Honolulu individually, and other counties and islands in Hawaii, had robust housing construction up until about 1972 or 1973. Then it collapsed after that, and it’s never recovered. It’s been declining ever since. 

We attribute that to a number of things: the Hawaii Environmental Policy Act of 1974, [and] the impact of [the] Land Use Commission, [which] was established in the ’60s. Interestingly, this is very similar to what happened in California in the ’60s and early ’70s, which in coastal California had a decline that even predates what happened in Hawaii, but, starting in the early ’70s, interior California started having substantial declines also.

Again, we see a lot of parallels. It all comes down to land use and making things illegal. Basically, building new housing has been made illegal. Reasonable density we call it light-touch density has been made illegal. Having two units on a lot is illegal. And all of these things just drive up the land cost.

Now Honolulu has land costs that are commensurate with the price-per-acre that California has. Again, if you force the land cost up artificially, then that’s going to force the price of the housing up.

Akina: You talk about forcing the land cost up artificially. I like to think of it also as producing an artificial scarcity of land. We like to say that the reason that housing is so expensive is that land is scarce in Hawaii, but our own research shows that we actually develop on only about 5% of the landmass, leaving 95% undeveloped. Regulations tend to have that effect. What do you say to people who say we have a scarcity of land?

Pinto: I don’t believe there’s a scarcity of land at all. The United States, if any country in the world should have housing that is economical … We have more land, and we’ve only used it for residential purposes. 

You cite Hawaii at 5%, I think for the country it’s probably even less. We have lots and lots of land compared to virtually any other developed country in the world. We have tons and tons of land. That’s No. 1. 

I agree with the suggestion that the Grassroot Institute has made, that by freeing up just 1 or 2 percentage points of the land that’s not available for — it’s not even residential construction, it’s not developed; the rest of the land, the other 95%, is agricultural and in conservation — if you were to increase from 5% to 7%, or a 40% increase in the amount of land that’s available, that would drive down the cost of housing tremendously in Hawaii. 

Secondly, the land that is that 5%, we’ve looked at that and we have found that the zoning and the residential zoning is what we’re talking about, and it’s usually called 3500 or 3.5, 5, and 7.5, which has to do roughly with the lot size and the required square footage for a structure — what we found was that, while technically two-family houses are available to be built on that, you can build it within the zoning. However, the density that’s required is usually 50% to 100% more land. That defeats the whole purpose. 

If you’re on a lot of 5,000 square feet, you want to put two-family rather than one[-family] on it, you now need 7,500 or 10,000 square feet in order to build that. Well, that drives the cost rate back up. 

We’ve calculated that if you were to have triplexes allowed broadly in these 3.5, 5 and 7.5 residential zones, which is most of what, for example, Honolulu County is owned as, for those three zones, if you were to allow the triplexes, duplexes and lot-splitting, which allows you to take a 7,500-square-foot lot and divide it in two, you could add 26,000 units over an estimated 10 years.

That would go a long way to meeting the shortage that the Hawaii Realtors say, I think it is something like, 80,000 units. We think there’s lots of land options. It’s just you have to make it legal and you have to free up the land.

Akina: Well, Ed, we both recognize the role that government regulation is playing in creating this artificial scarcity. There are a lot of practical solutions that are available. Yet it seems a little bit dismaying at times that legislators are looking at solutions that have practical problems to them. 

One is a solution called the Singapore model. You’re familiar with that. A couple of the features include the fact that it’s the government acting as the landlord, leasing out apartments to people who don’t really have a wealth-generating capacity in terms of being able to buy these as fee simple. I could go on with some of the features of this model, but what are your thoughts about it and its suitability for the Hawaii market?

Pinto: Well, just to be very succinct about it, I don’t believe it is feasible for the Hawaiian market. It is appealing. Why is it appealing? Well, Singapore has a homeownership rate of 80%. That’s very high 80% of the residents live in high-quality housing that is really high-rise flats that were developed by the government. 

However, Singapore is a very cohesive society. It has racial cohesion and income quotas that are associated with Singapore housing.

The housing is relatively affordable through a program that’s funded like Social Security. There’s a large tax that everyone pays that’s used to cross-subsidize. Most importantly perhaps, there are strong macro-prudential regulations by the government. 

Foreigners and those buying second homes can be charged increasingly large duties, and you also have the fact that the government is a city-state, unlike Hawaii, which is a state within a federal system, and Hawaii county is a county within a state. The city-state with an authoritarian form of government and a highly effective public leadership cadre it’s a roughly one-party system goes back decades and decades.

The government owns the land, and therefore they’re able to put this in place on what is in effect a small city-state that they control virtually every lever in the state. We think if that were tried in Hawaii, it might not be able to be scaled. 

That’s a big, big question. It would take a very, very long time which I don’t have a big problem with because anything to solve this problem is going to take a while. But the failure could come at a very heavy cost.

It could be like the public housing debacle that we had in the United States. That was a disaster that was a combination of federal, state and local efforts. The United States has a history of failing in these buildings supplied by the government. It’s expensive to build, and particularly, I think in Hawaii or any state, because there’s going to be unionization requirements, Davis-Bacon requirements [and] other things that require that the housing be very expensive.

There’s also a history in the United States, unlike probably Singapore, where things are not done within budget. We all know about the bridge to nowhere. We know about the train in California that’s three or four or five times over budget. We know about the Big Dig in Boston. 

It also lastly, I think, isn’t really what’s needed by the tenants. It really traps the tenants. Once they’re in, they really have a limited ability to move. They’re not really building equity in the traditional sense, thereby reducing mobility and really reducing wealth creation. 

I’m not a big fan of unbridled house price appreciation driven by government policies, but I am a fan of building wealth the old-fashioned way, which is you take out a loan, you pay it off and you get equity. That’s the way it should be.

Akina: Well, Ed, we tend to view the Singapore model in the same light, but we don’t want to be naysayers. When government leaders propose something, we commend them for trying to find a solution. But what we’d like to suggest is that there may be solutions elsewhere. 

Tokyo, on the other hand, could very well have an approach that could be used here, that involves the private sector rather than the government. Why don’t you tell us a little bit about the Tokyo model?

Pinto: Yes. We can bring up that graphic now. This is a change in house price and population over a 20-year period for four cities, London, Tokyo, I’m not actually sure where this Minato-ku [a section of Tokyo] is, and in San Francisco. What you see is, the blue bar [is] house prices and nominal prices, and the orange bar is population. 

You see that population let’s focus on London, Tokyo and San Francisco has barely grown in any of the three, but the house prices have gone up tremendously 4 1/2  times in London and well over double in San Francisco. And that was just through 2015. It’s gotten worse since. Whereas [for] Tokyo, the house prices are actually basically flat, and population is roughly flat also.

We have other data. What happened in Tokyo was that, under their constitution, which was set up by the United States government after World War II, it provided property rights, and those property rights were finally recognized pretty fully in the 1980s. Part of the property rights was that you could develop your property as long as it basically wasn’t disturbing someone else, [and] it wasn’t a nuisance. 

There were tremendous limitations on zoning. You could build a more intense development next to a lower -intensity development. You could build duplexes, quadruplexes, triplexes, high-rise buildings.

As a result, Tokyo has built more housing in a period than the entire state of California by a multiple. So Tokyo has been able to meet the needs of their population, meet the needs in terms of the cost, keep it affordable, both for rents and homeownership. 

The units have actually gotten larger over time. That’s one thing they were well-known for, was relatively small units. They’ve gotten somewhat larger. Whereas everything’s going in the opposite direction in a place like San Francisco or Honolulu.

Akina: Ed, what are some of the quick takeaways that Hawaii can learn from the Tokyo model and apply?

Pinto: I think the quick takeaways are you have to make development legal. There may be a desire not to allow high-rise construction everywhere, but you should be looking at what the price of land is. 

We already have talked about the fact that these prices are made artificially high through scarcity, but that’s the situation we’re in: high-priced land. If you look at the land around the H-1 highway, on the ocean side, the water side, that’s very high-priced land.

A lot of that is still just zoned for residential development on 3,500-, 5,000-, and 7,500-square-foot lots. That area with those land prices needs to be opened up for more intensive development and redevelopment. 

On the other side of H-1, that’s also zoned the same way, [and] that needs to be opened up for effective duplex, and I would add, triplex development.

 Again, what we found was that while you can legally build a duplex, the amount of land that you need is 50% more in some instances 100% more than the others, which defeats the whole purpose.

If you need more land to build the extra units, you’re going to go with the monster houses and with the McMansions, as they’re called. That’s what you’re going to build, because that’s the highest and best use of that property. 

What Hawaii needs to do is allow other uses that take advantage of this high land cost, spread it over more density. In some cases, that can be high-rise density as in Tokyo. 

In other cases, it could be what we call light-touch density, which includes two units on a lot, lot splitting, things like accessory dwelling units, duplexes, triplexes, cottage homes, all kinds of townhouses. 

These are all things that could be done. 

As I said, we think that in the case of Oahu, [it] would add 26,000 units over a 10-year period, just re-utilizing some of the existing land.

Akina: Ed, you’ve just written a paper on light-touch density and you’ve listed some of the ideas in that paper. Anything that’s particularly relevant to the Hawaii situation?

Pinto: Yes, we’ve looked at a number of natural experiments as we call them; one is Palisades Park, N.J., which happens to be where I grew up. I was driving through there one day and I happened to then go to Google. 

I was Googling Palisades Park, and I noticed that the population had almost doubled from when I lived there in the late ’60s. 

“Wait a minute, it kinda looks the same. It doesn’t have high-rise development. What went on here?”

It took me a while to figure out. It turns out that Palisades Park, from their initial zoning law, allowed duplexes on equal footing with single-family detached homes, and so duplex homes and single-family detached had equal footing. 

That’s not the way Palisades Park developed initially, it was fully developed, but eventually, as the land prices went up, the owners and builders found that they could tear down the homes and build duplexes or two-family houses. That was a more effective use. That had all kinds of positive ripple effects.

Not only did it rebuild much of the housing that was getting very old and was energy-inefficient, it also greatly added to the tax base of Palisades Park. Because you now had two units on the same lot that used to have one, and [this] also increased the value of the commercial properties in their commercial district, because now you had about 80% more customers within walking distance of those same areas.

It was a walkable area. There were just lots and lots of benefits from this, in addition to being a walkable area, which is healthy. We view those as lots of benefits, and we can show how the town next door had a completely different result. 

We can also show another town which is much like Honolulu. On paper, the town says you can build a duplex pretty much anywhere in that town. In reality, very few get built. Why? They require twice as much land as a single-family home, [and are] therefore economically not viable.

Akina: There you go. We’ve got a couple of minutes left and, just winding down, you referred to some of the developments in California recently that hopefully could translate into changes in Hawaii. California passed SB9, that allows a lot that traditionally was for one house to have multiple houses. 

In closing, how can we see these changes brought about in the political climate in Hawaii? What are some of the best approaches to convince our government?

Pinto: I think the best approach is to build a coalition of those that would benefit from this. In the Palisades Park case, there’s a lot of different people that would benefit from this. 

You’ve got homeowners who now have something worth something. Their land has a potential option to be used in another use, and has value. You’ve got the impact on property taxes — [they] can be lower. 

You’ve got the impact on commercial development. You have the impact on builders, developers and subcontractors, and all the other people that would be involved. And you have an impact on the workers that are service workers, of which Hawaii has one of the highest percentages of service workers in the country.

They need places to live, in ADU [accessory dwelling units]. There’s a lot of research out of California that shows how ADUs have relatively low rents compared to other similar-sized apartments. You’re adding in areas that are close to jobs. Those are other opportunities. 

There’s lots of opportunities to build a coalition among the willing, and actually overcome the NIMBYism that you’d otherwise run into. That’s happening around the country. 

You mentioned California. It’s happening in Oregon, it’s happening in Minneapolis and many other places where they’re embracing light-touch density.

Akina: Well, Ed, that’s a great idea. Thanks for all the research you do, your insights, and we look forward to working more with you. Thank you for being on the program, Ed.

Pinto: My pleasure. Thank you.

Akina: My guest today has been Edward Pinto of the American Enterprise Institute. I’m Keli’i Akina with the Grassroot Institute for “Hawaii Together” on ThinkTech Hawaii’s broadcast network. Until next time, aloha.

 

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