Kaua’i’s affordable housing mandate is making the affordable housing crisis worse.

Note — The paper below includes excerpted and lightly edited portions of a research project I wrote for a policy class in 2019 on Kaua’i’s Ordinance 860. While there are currently amendments to the housing ordinance before the Kaua’i County Council, I did not introduce the amendments, and to remain within the spirit of the Sunshine Law, I shouldn’t comment too specifically outside of a public meeting regarding my thoughts on the new bill. As of this writing (10/20), the current draft of the new housing ordinance exempts any development on land zoned R-10 or higher outside of the VDA (which leaves only some sections within a few of our town cores) ONLY if it builds to or beyond its allotted density with multifamily homes from complying with workforce housing requirements; it increases the affordability period from 20 years to 50 years; it increases the affordability requirements for resorts and residential development within the VDAs (Po’ipu, Princeville, some of Kapa’a) to 50% or an independent economic analysis with a floor of 35%; it reduces the workforce requirement from 30% to 20% for the vast majority of residential land on Kaua’i, it modifies the income distribution required to eliminate the 140% AMI option (basically market price) and requires more homes within the 80% and 100% AMI range.

The research below is meant to explain the problem with the current housing ordinance while presenting an argument for eliminating or reducing high affordability requirements for high-density construction within town cores. It does not address other aspects of the proposed amendments to the Housing Ordinance.

Issue Diagnosis

In 2007, the County of Kaua’i enacted Ordinance 860 which requires that any new housing development with more than nine units set aside 30 percent of the units for workforce housing. The ordinance has led to the production of zero affordable units because it has never been triggered (Kaua’i General Plan, 2018). Due in part to Ordinance 860 (along with the Great Recession), new housing construction on Kaua’i fell from an average of around 600 units per year for every decade from 1960 to 2010, to less than 200 per year since 2010 (County of Kaua’i, 2019). Due partially to the lack of new housing supply, the value of existing homes on Kaua’i has increased by 345 percent since 1984 (Evslin, 2018a) and the cost of housing on the island is 300 percent higher than the national average (Kaua’i General Plan, 2018). It is estimated that 44 percent of Kaua’i households are cost-burdened — meaning that they spend more than 30 percent of their income on rent or a mortgage — which is the highest rate in the State of Hawai’i (Kaua’i General Plan, 2018).

With very little largescale non-government subsidized private housing development occurring because the Housing Ordinance presents such a huge barrier to developments of ten units and above, 80 percent of the island’s new housing is from small-scale projects (below the 10 unit threshold that triggers Ordinance 860) on agricultural land and low-density residential (R-1 through R-4) far from town centers (Kaua’i General Plan, 2018). And less than one percent of new development is occurring in our multifamily zoning districts within the island’s town cores (PBR Hawai’i and Associates, 2015). According to the Kaua’i General Plan, this low-density construction exacerbates congestion, is “detrimental to the overall health of the community,” and it leads to heavy financial impacts on households as the cost of transportation (including gas, insurance, repair, and car ownership) now exceeds the cost of housing for the average island household (p. 115).

Data retrieved from County of Kaua’i, 2019

Affordable housing mandates (known as inclusionary policies or inclusionary zoning) such as Ordinance 860 are common throughout the country as a form of land-value capture (Jacobus, 2015). When public investment increases the value of land, state and local governments have a legal right to recover some of that increased value from private landowners through things like property taxes and affordable housing mandates. Studies have shown that as much as half of the affordable units in some municipalities are produced by inclusionary zoning policies (Brown as cited by Jacobus, 2015), but there is also widespread evidence that when affordable housing requirements are set too high that there is less construction, more luxury developments, and higher home prices across the board (Bento, Lowe, Knapp & Chakraborty, 2009; Tom and Stringham, 2012; Schueltz, Meltzer, and Been, 2010). In a review of the literature done by the Lincoln Institute of Land Policy (Jacobus, 2015), they conclude that while some inclusionary requirements lead to higher housing costs, it is possible to design a program that doesn’t impact market prices if it is merely recovering public investment in an area.

A recent study into the impacts of Kaua’i’s Ordinance 860 (Keyser Marston and Associates, 2019) showed that Kaua’i’s 30 percent affordable requirement is achieved by spreading the cost of development onto all of the other homes in a development. The report describes that the ordinance makes condos and apartments infeasible to develop because it increases the market price of the non-subsidized units too high for the market to bear. The cost burden becomes increasingly punitive as you move up in density count because the per-unit sale price is lower, so smaller units are less able to absorb the below-cost subsidy of the affordable units. While it has contributed to no large private developments being permitted since its passage and produced zero affordable units, if it were triggered, the study found that it would add .5 percent to the cost of a luxury home, 2.1 percent to the cost of a single-family home or duplex, 2.5 percent to the cost of a townhome, 5.1 percent to the cost of a condo, and 6.1 percent to the cost of an apartment. That’s an estimated increase of $27,800 to $37,100 per condo built (Keyser Marston and Associates, 2019).

Image from Workforce Housing Nexus and Financial Feasibility Analysis (Keyser Marston and Associates, 2019)

In line with the existing literature on inclusionary policies, the evidence is clear that Ordinance 860 incentivizes the production of luxury units while disincentivizing smaller and cheaper units. Therefore not only does Ordinance 860 result in no affordable units being produced, but it drives up the value of existing homes because so few new units are being built “as the basic notion of supply and demand suggests” (Jacobus, 2015, p. 12). Counterintuitively, the requirement for affordable housing is making our affordable housing crisis worse because it makes smaller home construction infeasible to build at the level of 10 units or more.

While there are many factors contributing to the housing crisis on Kaua’i, the Kaua’i General Plan cites Ordinance 860 as a barrier to affordable housing and recommends changing it as a priority action. After acknowledging the value of inclusionary housing policies, the Lincoln Institute of Land Policy (Jacobus, 2015) cautions that these policies “should not make developers responsible for resolving all of the affordable housing needs within a jurisdiction” but that they should “share a portion of the profits they make on the public’s investment in the places they develop” (p. 12). To achieve this, the Lincoln Institute of Land Policy writes that inclusionary programs need to be designed so that development is economically feasible and that they offer flexibility in the compliance options.

The role of supply in the price of housing

There are scores of studies showing that reducing building and zoning regulations spurs housing construction and leads to lower prices or, vice versa, that increasing regulations slows construction and leads to higher prices (Katz and Rosen, 1987; Glaeser and Gyourko, 2003; Ihlanfeldt, 2007; California Legislative Analyst’s Office, 2015). In simpler terms, the price of housing is directly linked to the supply of housing. As Albouy, Erlich, and Liu (2016) estimate, if you increase supply by 2 percent you decrease prices by 3 percent.

Graph from Strongtowns.com with datapoint for Kaua’i added based on data retrieved from Zillow and County of Kaua’i, 2019

Increased housing supply puts downward pressure on the value of all other housing units through a process called filtering. There is a large amount of recent research into this effect (Rosenthal, 2014; Zuk and Chapple, 2016; Cortright, 2018; Mast, 2019), but the basic notion is that the availability of new market-rate units allows people to move out of their existing homes and opens those aging homes for someone else to move in. When someone moves into that recently vacated home, they open up another lower priced home for a different family to move into. At some point at the end of the line is a vacant house in need of a tenant — and these are often older, cheaper homes that are available to low-income families or first time home buyers. In a process often compared to musical chairs, filtering ensures that older homes, like all other durable goods, will depreciate over time because there is less intense demand for them if housing construction keeps pace with population growth. According to researchers, “filtering has long been considered the primary mechanism by which markets supply low-income housing” (Rosenthal, 2014, p. 1). Todd Litman (2019), Director of the Victoria Transport Institute, writes that the research cited above shows that if the rate of development exceeds population growth, then the process of filtering will lead to a 3 percent annual depreciation in the value of older homes. The research shows that this process has an even larger effect on rental housing (Rosenthal, 2014). In a separate piece, Litman (2018), summarizes the lesson of filtering:

Communities that want true affordability, including middle- as well as low-income households, future as well as current affordability, and transportation as well as housing affordability, should implement policies to allow housing supply in walkable urban neighborhoods to increase faster than population growth.

Federal Reserve Data. Kaua’i existing home values in blue compared to Houston (famous for no zoning codes) in red. Adjusted for inflation, Kaua’i’s existing homes have appreciated in value by nearly 90 percent while Houston’s have appreciated almost zero percent.

Kaua’i’s population grew by nearly 5,000 people between 2010 and 2016 (interestingly, net domestic migration to Kaua’i is currently negative (DBEDT, 2020)), yet we only added around 600 additional resident occupied homes in those six years (not including TVRs or vacant/seasonal homes). For comparison, we built 600 new homes every single year in the four decades before that which led to much more stable housing prices through the latter half of the 20th century. This vast discrepancy in the increase in population versus the increase in new homes has driven the cost of our existing housing units up by 58 percent between 2012 and 2019 (Federal Reserve, 2020).

To put that into perspective, a home that sold for $500,000 in 2012 would sell for $780,000 in 2019. That’s an annual increase in value of $40,000 per year — which is equivalent to earning $19 an hour at a full time job. Meaning that the average homeowner on Kaua’i earns nearly twice the minimum wage just in the increasing value of their aging home. And those year over year annual increases have held mostly steady since coming out of the recession. This increasing value doesn’t materialize out of thin-air, it is coming out of the pockets of the next generation of home buyers, which puts Kaua’i’s children further and further away from homeownership every year.

But won’t building new homes attract more people to Kaua’i?

Many people believe that new housing units simply induce people to move to Kaua’i — and so not only do new units not help local families, but they also increase our island’s population. This idea is not far from reality, as the theory of induced demand (where additional supply creates additional demand) is well established for new road construction. But, while new roads clearly induce more driving, Cortright (2019) argues that the same effect on housing markets is unlikely to be significant because while deciding to go for a drive is close to free (“willingness to tolerate delay” and gas being the only cost), homes are expensive and require people to actually move out of their communities to acquire them. So, while the research is clear that new road capacity will quickly fill to pre-congestion levels overwhelming the additional supply with new demand that wouldn’t have occurred otherwise (Jorgensen, 1947; Duranton & Turner, 2009; Hansen and Huang, 1997), there is no such research showing that the same occurs for housing.

The only published study (Asquith, Mast, Reed, 2018) looking specifically at migration data into popular places with new construction compared to those without showed that while new construction does induce some new people to move into a community from different areas in the city or metropolitan region that wouldn’t have moved otherwise, there are still reductions in rent in nearby housing units from the increased supply. Meaning that the induced demand was not enough to overwhelm the supply.

There is some data available for Kaua’i. The workforce housing study commissioned by the County (Keyser Marston, 2019) showed that 50 percent of new units on Kaua’i were sold to off-island buyers between 2013 and 2018. To determine the level of induced demand we would have to know how many of those people would have bought a home on Kaua’i anyway (and so would have bought up existing housing stock if not a new one), which we can’t answer with the available data. Regardless of the exact level of induced demand, the workforce housing study showed that the number of off-island sales are very high within the Visitor Destination Areas (65%+) and very low for some of our town cores. For example, just 8 percent of newly constructed units sold in Lihu’e between $500,00 and $1 million went to off-island buyers between 2013–2018 — and the figure was 0 percent for homes sold both above and below that price range within Lihu’e.

While we can’t determine the exact level of induced demand from any particular development, the evidence is clear that the cumulative impact of induced demand is not enough to overwhelm the downward price pressure on existing nearby units from the additional supply and that it is going to be significantly less outside of our visitor destination areas (like our town cores). It’s also worth reiterating that the overwhelming body of research cited above showing that additional housing supply puts downward pressure on the price of existing housing units is real-world data from metropolitan areas with high levels of population growth. If the induced demand from new housing construction overwhelmed the additional supply in these locations, then there would be no evidence that increased supply led to reduced prices.

Affordable housing advocate and author of the The Rent Is Too Damn High: What To Do About It, And Why It Matters More Than You Think, Matthew Yglesias (2017) writes that because local governments have very little capacity to control demand — it’s important for planning documents to focus on “how to channel that demand in a constructive way that builds an inclusive city.”

The need for a new ordinance with exemptions for higher density areas

As discussed above, the Kaua’i Housing Nexus Study (2019) clearly shows that Ordinance 860 makes smaller, higher density home construction in our town cores infeasible. And, these are the very units which are most likely to go to local home buyers. This is because the five to six percent price increase necessary for the market-rate units to absorb the below-cost subsidy is higher than the market can bear. Whereas in a luxury housing development where prices are much higher, the half-percent price increase necessary to subsidize below-cost units can easily be absorbed by the market. As discussed briefly above, this creates a disincentive to develop smaller units within our town cores and an incentive to build luxury single-family homes for non-residents.

As discussed by the Lincoln Institute of Land Policy (2015) — inclusionary policies work when they are simply recapturing public value from public infrastructure investment. However, on Kaua’i, developers have to pay directly for the cost of infrastructure. Not only are they paying for the roads, utilities, drainage, and sewer within the development, but the County of Kaua’i Wastewater Division charges $3900 per unit to connect to sewer (plus all associated construction costs to actually make the connection to the sewer line), the Planning Department charges $1,000 for an Environmental Assessment Fee for multifamily units (and only $250 for each single-family unit), and there’s a Facilities Reserve Charge of $9,880 per unit for multi-family units to get a water meter from the Department of Water plus any associated improvements needed to bring the main water line up to code to ensure adequate flow for fire protection. And, with two off-street parking stalls required per residential unit, for some higher density developments within our town cores, this means an expensive parking garage which can add more than $50,000 to the cost of each unit (Hoyt and Schuetz, 2020). Through the above infrastructure requirements for a new development, plus the assessment fees and off-street parking requirements, developers pay directly for almost all of the public infrastructure necessary for a project.

However, roads are one piece of critical infrastructure that developers are not paying for. For that, we can recover some of the public’s investment through an inclusionary policy. While all housing developments rely on roadway infrastructure to some extent — the further the development is from a main job center the higher the level of public subsidy because the reliance on public roads increases based on population density and distance from major job centers. As Glaeser (2011) writes, as population density is reduced by half, gas consumption increases by 106 gallons per year, household carbon dioxide emissions increase by almost a ton per year, and the share of the population that drives to work increases by 6.6 percent. Because County roads are maintained primarily through an excise tax surcharge, roadway maintenance and construction is paid not by users of the roads but through a regressive tax on all consumption by all residents (including rent, groceries, and medicine), regardless of how much they drive (Evslin, 2016). Plus, the public cost of providing county services such as trash pick-up and police protection increases as density decreases. Therefore, low-density developments far from town rely disproportionately on public roadways and public services subsidized by all residents and are ripe to share some of the profits from private development with the public at large through affordability requirements.

For developments within existing towns, the high cost of construction, plus the lack of public infrastructure investment for the project, along with municipal savings on services for those units, and the general need for smaller housing units close to jobs to save on transportation costs all combine to create the need for an inclusionary policy that differentiates higher density town core developments from low-density developments far from town. This is reinforced by the County commissioned housing study referenced above which states that “feasibility is challenging for apartments under current market conditions even with no workforce housing requirement in place.” Meaning that even without an affordability requirement, the high cost of apartment construction makes them unlikely for a developer to pursue without other incentives. Given that, the report recommends that the county consider eliminating the affordability requirement for apartment construction while maintaining it within Visitor Destination Areas (Keyser Marston and Associates, 2019).

Conclusion

By incentivizing development within Kaua’i’s town cores through a reduction or elimination in the affordability requirements only for developments that maximize their allotted density, we can realize the goals outlined in our General Plan to reduce the market cost of housing (Evslin, 2018a), reduce the cost of transportation (Evslin, 2017), reduce the per-capita county cost of infrastructure and services (Evslin, 2018b), reduce development pressure of agricultural land, and reduce carbon emissions islandwide (Evslin, 2018c). This also satisfies the Lincoln Institute of Land Policy’s (Jacobus, 2015) recommendation that inclusionary policies ensure that development remains economically feasible and that they offer flexibility in compliance options. Lastly, maintaining the affordability requirements in low-density developments far from town will ensure that the County can recover (in the form of affordable housing units) public infrastructure investment and the higher cost of service in those areas while helping to preserve open space and agriculture areas.


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