In a misguided effort to create more affordable housing, the Maui County Council is about to make the problem worse.
The Council is considering a measure, Bill 107 (CD1), that would lower the cost of homes designated as “affordable” by changing the rules that govern how the sellers can price them. The bill was approved by the Council’s Affordable Housing Committee and had a first reading by the full Council yesterday. It will take up the bill again on Monday.
Though the intention of Bill 107 is to lower Maui home prices, it attempts to do so by creating new price controls for affordable homes. Unfortunately, history demonstrates that price controls inevitably lead to scarcity. In a county that is already suffering from a housing shortage, additional price controls will drive the price of the average home even higher.
If Bill 107 is limited to only a certain sector of housing, how will it affect housing prices as a whole? To understand the ripple effect of Bill 107’s price caps, it is necessary to review the existing rules on affordable housing.
Maui currently requires a certain number of homes in any subdivision to be set aside as workforce housing. Those homes must be sold at below market rates to qualified buyers who earn between 80% and 120% of the median income for the area.
There’s a complex formula that governs exactly how that pricing system works, but to put it simply, the cost of the mortgage plus interest can be no more than 30% of gross household income. This system was set up to encourage the construction of affordable homes without making it impossible for homebuilders to get a return on their investments.
Homebuilders need some incentive to take on the risk, expense and difficulty of constructing new homes. Already, the workforce set-aside contributes to higher average housing prices.
After all, construction costs don’t go down just because a home is sold at below-market rates. This forces homebuilders to raise the prices on the remainder of the homes to ensure that their projects as a whole are profitable.
Bill 107 makes the below-market prices for workforce homes even lower by requiring total housing costs to fit within 31% of gross household income.
“Total housing costs” under this bill include not only the mortgage and interest, but also homeowner association fees, property taxes, private mortgage insurance and home insurance. Such additional costs can vary, but on average, adding them to the total price that can be charged for workforce housing lowers the actual sales price of the home by 20% to 22%.
For example, a hypothetical three-bedroom home for a family making 80% of the median area income may be sold at $374,900, well below the market rate. Under Bill 107, that same home would have to be sold at $283,671, a difference of $91,229 or 24.33%.
That same home sold to a family making 120% of the median area income, which still qualifies for below-market affordable housing, would currently be sold for $562,300. Under Bill 107, the sale prices would be reduced to $444,055, a difference of $118,245 or 21%.
Remember that homebuilders would not be saving an additional 20% on the construction of the affordable homes. The assumption is that they would simply have to take that additional loss. In fact, Bill 107 is especially badly timed given that the recent surge in inflation has made construction in Hawaii substantially more expensive.
This bill would make it near impossible for homebuilders to realize returns on their investments. As a result, they likely would switch their focus to building homes that don’t trigger the new affordability requirements, such as very high-end properties, or stop building altogether. That, in turn, would further reduce the stock of available housing and drive the average housing price even higher.
Like too many community activists and Maui County lawmakers, Bill 107 ignores the economic reality of supply and demand and attempts to “solve” the housing crisis by tinkering with prices.
Given that what we really have is a lack of supply, policymakers should be focusing on ways to encourage housing growth, not throwing up new barriers to development.
Adam Smith, one of the world’s most famous advocates of economic freedom ever, wrote: “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.”
The same is true of homebuilders. When it is no longer in their interest to build homes, they will stop. Then we will have even fewer available homes, higher housing prices and more people moving to the mainland because they can’t afford to live in Hawaii.
It is time that we stopped treating homebuilders as the enemy, and “profit” as a dirty word. If we are going to solve Hawaii’s housing crisis, we need to build more homes. It’s as simple as that.
Forget Bill 107. All it would do is erect another roadblock and leave us worse off than before.
This commentary was Keli’i Akina’s weekly “President’s Corner” column for July 16, 2022. If you would like to have his columns emailed to you on a regular basis, please call 808-864-1776 or email firstname.lastname@example.org.