Regulatory costs drive up cost of new condos in Hawaiʻi, report shows

A new report from the University of Hawaiʻi Economic Research Organization shows that regulatory costs are the major contributing factor the the highest housing costs in the nation.

The report, released March 4, shows that the costs of regulations account for more than half, or 58%, of the price of a new condominium in Hawaiʻi. The median sale price of a new two-bedroom condo in the state is about $670,000, more than double the price in the average state, and regulatory costs comprise $387,000.

Regulatory costs are anything that raises production costs above the price of land, materials and labor.

In essentially all new developments, developers are required to contribute to the upgrading of local infrastructure. For example, the developer might be asked to fund upgrades to local roads, sewers or electrical infrastructure in exchange for permit approval.

“This portion of regulatory costs is not entirely wasteful because it generates needed infrastructure,” says the report written by University of Hawaiʻi Economic Research Organization assistant professor Justin Tyndall. “However, putting the cost burden of infrastructure on developers rather than funding infrastructure through general property taxes significantly inflates the cost of housing production and effectively asks new homebuyers to bear the full costs of new infrastructure.”

In addition to direct fees paid by developers, regulatory costs can arise because of the extremely slow and complex procedures involved in getting housing permitted.

Condominium construction in Hawaiʻi is intensely regulated compared to other states, requiring more layers of approval and risks of legal and political obstacles.

For multi-family projects approved in the state during the past five years, the median wait time for a permit was more than 400 days.

Hawaiʻi also has strict zoning and building codes compared to other states, and the complexity of regulation means few firms are large enough and have the needed influence to successfully complete large multi-family projects. This could lead to an uncompetitive market.

“Regulations can create important community benefits such as environmental preservation and affordable housing units. However, it is worth weighing these benefits against the huge burden of high housing costs,” the report says. “In a market with lower regulatory costs, developers would have strong financial incentives to provide much more multi-family housing than they currently do. More housing production would lower housing costs, which could have significant benefits for overall housing affordability in the state.”

The other factors besides regulatory costs are the high cost of land and the high cost of construction materials and labor, both the highest in the nation, according to the University of Hawaiʻi Economic Research Organization.

“Condominiums can provide a point of entry into the housing market for new households,” wrote Tyndall. “Without a flow of condominiums, households compete for what scarce housing is available, pushing up prices in the condominium and single-family markets alike. Meeting Hawaiʻi’s housing needs requires a significant amount of new housing supply, which could be realistically provided through multi-family housing development.”

Read the entire report on the University of Hawaiʻi Economic Research Organization’s website.