Hawaii has the highest median home prices and rents in the country, and they have been increasing substantially over the past 50 years.
But prior to that, says Jensen Ahokovi, a research associate at the Grassroot Institute of Hawaii, housing prices were fairly stable — not only in Hawaii but around the world.
So why have those prices spiked over the past half-century?
Speaking earlier this month at a sustainability conference at Chaminade University of Honolulu, Ahokovi said he and economist Gerard Dericks of Hawaii Pacific University concluded in an academic paper they have been working on that it is mainly because of excessive regulations.
Ahokovi said their conclusion was based on an examination of housing markets worldwide, in some cases going back as far as 400 years, in cities such as Amsterdam, London, Dublin and Beijing.
He said that in the U.S. especially, “there has been a huge amount of research that has found that housing regulation is the culprit behind high prices and lower supply elasticity.”
He also said attempts to lower housing prices by reducing demand — through policy interventions such as restrictions on foreign ownership, second homes and short-term rentals, mortgage subsidy programs and single-family zoning — “end up worsening the issue because [they don’t] address the origin of the problem, which is supply.”
If we “make it expensive to build housing,” he said, “we shouldn’t be surprised that housing prices, as a result, are also expensive.”
To see the entire presentation, click on the video below. A complete transcript follows.
Jensen Ahokovi: Good afternoon, everybody. My name is Jensen Ahokovi. I’m … a housing researcher for the Grassroot Institute of Hawaii, which is where Joe [Kent] is from.
And I’m also here today with one of my co-authors, professor Gerard Dericks from HPU [Hawaii Pacific University]. And today I’m going to be presenting a paper that Dr. Dericks and I are working on.
And as you can see, it’s titled, “What can longest-run house price indices tell us about the current housing crisis?”
And the presentation is going to follow a fairly straightforward outline. I’m gonna present some stylized facts about housing market conditions that I’m sure we’re very familiar with, especially being in Hawaii.
Then I’m going to present some of the data that we have available, from here and abroad, and then go over what professor Dericks and I think can explain recent trends in housing prices.
And then we’ll wrap it up with some of the policy implications of our research.
So, to start things off, here in Hawaii, locally, nationally, internationally, if there was one way to summarize the housing market, it would be the word “expensive.”
Housing prices, globally speaking, have increased quite substantially since World War II — so substantially, in fact, that prices have exceeded income growth in most countries.
If you look domestically, here in the United States, sales inventory has been declining, which, of course, is a recipe for rising prices.
If we look at the rental market, for instance, which is predominantly made up of middle- to low-income earners, we see that the growth in rents has exceeded the pace of inflation. So, that’s disproportionately impacting a lot of working Americans here.
And then, if we just look here locally, I mean, everybody knows Hawaii is very expensive. Hawaii has the highest median home prices and rents in the country. So, as you can see, there’s a lot to not like about our current housing situation.
Here are just a few graphs. I apologize, it might be a little difficult to see. But these charts here kind of characterize what I’ve just stated about housing market conditions, and these graphs border around 50 years in terms of time span.
This top graph here is of a very popular price index, known as the Case-Shiller Price Index. This is provided by the St. Louis FRED [Federal Reserve Economic Data] database, and it goes all the way back to about 1985, and you can see that, since the beginning of the time series, house prices just keep going up, even despite the Great Recession where prices dip for a little bit, and then they continue back up.
To the right here is another time series that is provided by the Federal Reserve Bank of Dallas.
This red line here is the United States, and it goes back from ’75 to 2010.
And this blue line on the bottom is an aggregate line of 20 other advanced economies put together into one price index.
And what you can see is that the United States and the rest of the aggregate cohort exhibit pretty much identical price trends. That is, since the latter half of the 20th century, home prices have just continued to rise. And these are real housing prices, accounting for inflation.
The U.S. obviously does have higher levels, relative to the aggregate cohort, but their trajectories are pretty much identical.
And then this bottom graph here comes from the OECD [Organisation of Economic Co-operation and Development), of a bunch of OECD countries. And this goes back only to 2015, but as you can see, this graph also says the same story as these other graphs, which is that in the short run, in recent history, we see very rapid price growth, not just here, but abroad.
But then, that begs the question: What happens if we go beyond 50 years? What happens when we span, maybe not decades, but maybe centuries?
And so this leads us to Amsterdam. And this chart here displays what is known as the Herengracht index. And I probably butchered that, but the name originates from what is known as the Herengracht canal in Amsterdam, and it’s one of the four major canals.
And this is actually the longest running time series of real estate prices in the world. And it spans 400 years, and it goes all the way back to 1620.
And what you see here is actually a very different picture from the previous time series. And you see that for centuries, real house price growth is effectively zero. Up until you get to the latter half of the time series, and then you just see a spike in prices. So what’s going on? What exactly is going on?
[Shows a photo on the screen.] This is professpr Dericks, actually at the Herengracht canal. You were there last year, right?
Gerard Dericks: Yeah.
Ahokovi: Yeah. Last year, right?
Here’s another time series from Dublin, Ireland. These are two separate time series, constructed differently, but both combined, span 1709 through 2015.
And you see pretty much the same picture that we see from Amsterdam. That is, for centuries, effectively zero real price growth, up until the latter half of the 20th century.
Here’s a graph from Beijing. This is slightly different. It covers the pre-World War II period of 1644 to 1840, but once again, real price growth is effectively null, not much price growth. Prices apparently seem fairly stable during that period.
And then here we have three different time series put together on the same chart, which goes all the way back to 1890, up until 2010. And if you can’t see, this also includes the U.S., Norway and the Netherlands, and very similar picture to all the other time series that we’ve seen — effectively zero price growth for centuries, and then you see a spike in price growth in the latter half of the 20th century.
Now, I think you guys can see a pattern emerging, so I’ll — at the risk of being too repetitive, this is going to be the last time series I show you guys.
This is a time series of 14 different advanced economies, since 1870, all the way to 2012. And across every single one of these countries, effectively the same thing in the pre-war period — practically zero real price growth, and then in the latter half of the 20th century, pretty much each country experiences some semblance of a spike in growth in terms of real housing prices.
So, when we look at the long-run data, what does it tell us? Well, obviously, we all saw the pattern in the data. For hundreds of years, the real house price growth has been effectively zero. And this is perfectly consistent, actually, with standard economic theory.
What standard economic theory tells us is that as time extends, as we go into the long run, prices should be what we call fairly elastic, or maybe even perfectly elastic. Now, if you’re not up to date with your economic lingo, elasticity merely refers to how supply and demand responds to changes in price, right?
So, for example, if we have an increase in the demand for housing, and we’re not necessarily building enough homes to meet the demand — right? — we might say that the supply of housing is inelastic. It means that the supply of housing is fairly unresponsive to any changes in price — versus the opposite case, where, if there’s an increase in demand, and we’re able to meet that demand, or even exceed the expectations of that demand, then we might say that the housing supply is elastic, right?
And so, this long-run data is fairly consistent with economic theory. That is, prices are elastic in the long run.
So, that leads us to ask the question: What explains all those huge spikes in prices that we’ve seen since World War II? And what professor Dericks and I have come to is that we frankly believe that the reason is regulation-induced supply inelasticity.
And to understand that, we should understand a bit of price theory first.
So everybody knows, everybody’s heard of supply and demand. Prices are a function of supply and demand, right? Which is, demand can be considered the willingness of a buyer to pay for a product, and supply can be understood as a seller’s cost in producing that product.
And prices are important. They convey very important information to buyers and sellers. Typically, in a healthy market, what we would see is that, if a price of a good goes up, then producers would be incentivized to produce more of that good, but at the same time, consumers would be less incentivized to consume that good.
And it’s because of these counteracting forces that we reach what we understand as a market equilibrium, a market-clearing situation.
This is a classic example of what we would consider a market at equilibrium, where we see here at the intersection of our supply and demand curves, this is our market-clearing or equilibrium price of a good, and this is our equilibrium quantity of the good that is supplied.
Usually, a healthy housing market can achieve some semblance of market clearing or equilibrium.
So, now that we understand that, let’s look at the demand for housing. What’s exactly happened to demand? Well, since the Industrial Revolution, there have been huge increases in global populations. There have been huge increases in income. Both of these factors are huge factors behind the growth in housing demand.
In Amsterdam specifically, where we see the Herengracht index, it had a tenfold increase in population, and a twentyfold increase in GDP throughout history.
Now, if we look at a time series of Holland, which is the larger region that Amsterdam belongs to, we see that there is a massive growth in GDP, and also a growth in the local population.
But then when demand goes up, prices should go up, too, right? And when populations and incomes increase — right? — people are more willing to buy homes. So, the price of a home should go up as population and incomes go up. But as we see, that hasn’t been the case throughout history. Even in spite of this huge growth in these demand-side factors, prices have still remained stable throughout that period.
This is a graphical representation of what an increase in a demand curve looks like. It’s just a shift of a line. And this is in the context of a market similar to that market equilibrium graph, where you see this top blue line here shifting upwards and to the right.
And we see that an increase in demand increases the market price and the market quantity that is produced. That is, of course, what we would expect if we assume that the supply is fixed.
So, that leads us to our first puzzle, as I said. Why have prices not increased despite the fact that populations and incomes have grown?
And we believe that it’s because the long-run supply of housing is pretty much perfectly elastic, if not near perfectly elastic. And that’s why we would observe those relatively stable trends in price growth.
Now, contrasted to the first diagram that we showed, this is what a very perfectly elastic supply curve looks like. It’s horizontal. And you see that if we see that similar increase in demand with the perfectly elastic supply curve, that price doesn’t change at all. It stays. But the market quantity increases.
What this tells us is that with elastic supply, you’re able to increase the amount of goods that you can provide, while effectively having no effect on the price. And this is what Dr. Dericks and I think explains that long period of stable price growth.
Amsterdam is a really good example of this, because the way it’s organized is in concentric semi-circles around the major canals. And throughout history, if the builders wanted to build a home, all they would do is just build another ring. They would build another semi-circle of houses, and you have canal sprawl, where you just get larger and larger concentric semi-circles of housing.
And that in effect is a perfect example of how suppliers are able to respond to changes in demand.
So now we turn to the latter half, where we see this huge spike in prices. Those previous slides of supply elasticity explain why we’ve seen stable growth, but what explains the huge spike? And it’s likely regulation.
When we think about housing regulation, what housing regulation does, is it adds costs and uncertainties on the production side of things, right?
And if producers are uncertain about how regulation is going to add to the cost of their goods — if the permit for a housing development takes a long time, for example — that just adds costs and costs to the process, which drives up prices.
Here are some estimates from the literature, of how regulation affects supply elasticity, and I’ll try to go through these as fast as I can.
In France, about 60% of the variation in cross-city supply elasticities can be explained by regulation, right?
If we look in China, housing regulation has reduced the supply elasticity of housing by about 30%. In the OECD, since the ’80s, supply elasticities have been largely linked to geographical constraints, land-use regulations and tighter rent controls.
If we look in the U.K., house price growth since the ’70s would have been 100% lower if all regulations were removed.
So, for example, if you had a home in 1974 in the UK that cost $79,000, in 2008, if all regulations were eliminated, that home would’ve been $147,000. But actually in 2008, that home is actually $226,000.
And then in the U.S.A., there’s just been a huge amount of research that has been done in America that finds that housing regulation is the culprit behind high prices and lower supply elasticity.
This is all to say that regulation just makes it difficult for the supply of housing to meet the demands of consumers.
Now, there could be some alternative explanations, right? It might not just be that supply and regulation is the explanation, right?
So, it could be that costs, production costs have increased over that same period. For example, the cost of building, it just goes up, prices should go up as well.
But that’s probably unlikely, right? And that’s because we see in skyscraper technology, for instance, similar building technology which were invented in the latter half of the 19th century, that couldn’t possibly really explain the latter half of growth in the 20th century.
And if we look at inputs, for instance, like steel and iron, this just charts nominal steel and iron prices, unadjusted for inflation. In this period, it’s fairly stable, so that, you know, somebody might see that and think that it explains the stable growth.
And then they see this spike and they say, “Oh, that’s got to explain the spike in house prices.”
But remember, these are nominal prices. So when you actually adjust them for inflation, you find that actually, the real price of steel and iron has gone down throughout history. Production costs and input costs have actually decreased. It’s actually about a third. A third, right?
Ahokovi: Yeah. It’s actually about a third of what you see here.
So then, what are some policy implications about all this research? Well, clearly, the house price growth that we’ve seen is purely a modern phenomenon. People might think that housing prices are just going to increase forever, because that’s the nature of housing.
But that’s actually not true, as we’ve seen from the long-run data.
If we want to talk about affordability, housing supply is the key to affordability. And how do we restore that? it is to restore development rights to private landowners. And that’s just a long-winded way of saying, to deregulate the housing market, right?
There are just fairly a lot of loopholes that developers and just people who want to build, they have to jump through to be able to just build a home here. Especially in Hawaii.
And then also demand-side policy interventions do not address the origin of the problem and ultimately will probably fail to improve affordability.
This is something that is less focused on — might be because it’s politically incorrect to say — but if you have things such as restrictions on foreign ownership, like in Vancouver, extra taxes on foreigners in Hong Kong, restrictions on second homes, short-term rentals, all these things, even subsidy programs, mortgage subsidy programs, all of these are demand-side policies that try to reduce the demand for housing, to lower prices.
But in reality, they end up worsening the issue. That’s because it doesn’t address the origin of the problem, which is supply. A good way to think about this, and I’ll close with this, is that supply inelasticity worsens demand shocks.
A lot of people, like to say here in Hawaii, for instance, if we have an influx of outside buyers, it’s going to raise prices here. So we need to do something about outside buyers.
Well, that’s technically true. An influx of buyers on an additional or on a scarce good will raise the price, but that’s only because the supply is inelastic. That’s only because the supply is fixed.
If you consider a counterfactual, an alternative scenario, where the supply in Hawaii is bountiful, and that there’s fewer regulations on supply in Hawaii, then any increase in demand can be counteracted by an increase in supply.
And that’s because we make it easier for supply here to respond to changes in demand. And I think that’s probably a good way to think about these issues.
And I’ll close with this quote from a paper in 2012, and it says: “While the economies of the developed world have ostensibly been liberalized over the past several decades, land-use regulation has, by contrast, generally expanded and intensified.”
And so, what that says is that basically, we just make it expensive to build housing. And so, frankly, we shouldn’t be surprised that housing prices, as a result, are also expensive.
And with that, I’ll close. That was a lot of material, so if there are any questions, feel free, feel free to ask. Thank you.
Student 1: Sorry.
Audience member 1: I love this kind of stuff, and I think you did a fantastic job. And I just was wondering, has there been a study where they’ve gone state by state to see which states have had the most regulations and how the housing crisis is? Because I would imagine, Hawaii, California, places like that, we just …
Ahokovi: Yeah. No, great question. Yeah. So, there’s actually this thing known as the Wharton Residential Land Use Index — something like that — and that is the primary metric that measures how burdensome regulations are state by state.
Now, can you guess who’s No. 1 on that list?
Audience member 1: Hawaii.
Ahokovi: Yes, Hawaii is No. 1 on that list. And, yes, so, I think 99% of economists would agree that housing regulation increases prices, but there’s probably just some disagreement over the magnitude of how prices are affected by regulation.
There’s a really interesting study by a couple of economists from 2021 that calculated something known as the zoning tax, and it’s theoretically the amount of money that regulation adds to the price of housing.
And what they found is that, in the most regulated areas of the country, obviously, regulation adds the most to the housing price.
So, for example, in LA, regulation, they found, adds on to about a third of the housing cost there. So, $200,000 of the housing price in LA could be explained by the stringency of LA’s housing regulations.
And this is the same for pretty much everywhere that is highly regulated. And you can imagine what it might be for Hawaii.
Audience member 2: I’m just ignorant on the subject, I think. When you’re talking about, like, deregulating housing, making it cheaper, what regulations are increasing that are affecting us so bad, and how are they getting [inaudible 00:23:34]?
Ahokovi: Well, so, I can think of one really good regulation to start off with, and it’s known as single-family zoning. So, if you look at a map of Oahu, for instance, and you look at all the areas where housing is allowed to be built, the vast majority of that area is zoned for only single-family residential units. So that means that only a single home can be built per plot of land.
Now, if you subfilter that by looking at the areas of Oahu that allow more than one unit of housing, it’s only a super small fraction of that. Effectively, what that does is it limits the ability to have multiple homes on a single plot of land.
Now, that obviously restricts the supply of housing. Now, on the other hand, New Zealand recently …
Audience member 2: [unintelligible 00:00:34] like it seems that we actually have [unintelligible 00:00:38]
Ahokovi: Yeah, so I think that’s popularly thought, but the reason why I would say economists would disagree with the idea that zoning is a good thing for environmental protection is because what zoning does is it encourages urban sprawl. It encourages people to expand out, rather than in, right?
So when you encourage people to … I mean, we see it every day. You see how much traffic there is from Kapolei heading into town? That’s a consequence of strict land-use regulation. It causes people to rely more on transportation methods that can increase carbon usage, it increases all these pollutants. Whereas if you’re able to condense everybody into an urban core, you reduce the reliance on carbon-emitting transportation, like cars; you encourage the use of, you know, just walking to work, taking the train or something.
But yeah, single-family zoning, that would be an example.
And as to why people do it if it’s so obvious, I guess, you know, sometimes it’s just more politically advantageous for city councilors and local lawmakers to pass those kinds of laws.
There’s a popular movement known as NIMBYism, not in my backyard. So people always want affordable housing. They say they want it, but just not in my backyard, you know, because, you know, traffic congestion. But that kind of stuff gets votes. This kind of stuff doesn’t get votes, unfortunately. So, yeah.
Moderator: Any last questions?
Ahokovi: Cool. Thank you.