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Open Season On Speculators

posted in: Weekly Commentary 0
By Lowell L. Kalapa

(Released on 03/04/07)

Here we go again, lawmakers are blaming “speculators” for overheating the real estate market. These are the same people lawmakers pointed the finger of blame at when the real estate market overheated in the late 1980’s and early 1990’s.

But back then, it was those “nasty” foreign investors who were buying up all the property, driving prices sky-high and driving people out of their homes because of rising real property values. Well, the real estate market is red-hot again and not because of those “nasty” foreign investors. With the “historic low interest rates” many of the investors in the local real estate market are actually longtime residents who are moving up. True, there are some mainland purchasers in the Hawaii real estate market, but they are largely buying resort, second home types of properties.

And while those low interest rates allowed local buyers to buy “more” of a home because they could afford the monthly payments, some of the resurgence in the real estate market has to do with the artificial stimulus lawmakers threw into the pot a few years ago when they extended tax credits to new construction and renovation of existing homes. Did that tax credit artificially stimulate demand driving up the cost of construction while at the same time interest rates began to fall?

Regardless, now some lawmakers see folks making a “quick” profit on buying and selling homes and they want to spank those people because they believe they are taking advantage of the market. What they seem to forget is that those “speculators” are investors who see opportunities and that is what the free market economy is all about. No one who “invests,” invests with the hope of losing money. Nor will investors invest where there is no promise of a return on their investment.

Successful investors are driven by the law of supply and demand, if there is too much supply, it is unlikely that a return on investment can be made as opposed to the situation where the supply is limited and there is great demand for whatever commodity people are chasing. In this case, it is the inventory of housing in Hawaii that happens to be in short supply relative to the demand for that housing. This is the same force that drives inflation. When there is not enough supply and people can’t do without some product or service, prices will rise.

So what is constricting the supply of housing? As a HUD official exclaimed a couple of weeks ago, she was shocked at the number of barriers and hurdles there are in Hawaii to achieving affordable housing. It is well acknowledged that the time it takes to get a project off the ground from the time one first applies for a permit to the time the first spade is turned in the ground can be a minimum of five years.

So how does that delay in the permitting contribute to the high cost of housing? Even before the project is built, the developer has to put the plans together on which the application for permits and changes in zoning, if necessary, are based. This means a cadre of workers must be hired to do that job. That costs money, so the developer either gets investors or borrows the money from the bank. That means both the investors and the bank expect to be paid for the use of those funds. So every day the clock runs, the cost of that money grows. The longer the permitting process takes, the more complications and hurdles to overcome, the more expensive the project becomes.

If the permitting agency exacts concessions that will cost money such as providing so many affordable units or perhaps a golf course or play ground, that cost has to be recouped in the cost of each unit, driving the price even higher. So when that unit comes on the market, it is already expensive to begin with and because it has taken so long to get the unit to market, the additions to inventory come very slowly thus limiting the supply to a pace slower than a snail.

That situation makes it ripe for substantial gains to be made in a relatively short period of time. So now lawmakers want to punish these people by approving a surcharge on the capital gains realized from short term sales or higher conveyance taxes on residential property that is bought or sold and will not be owner occupied.

Unfortunately, what lawmakers don’t realize is that punishing investors, who in their eyes are speculators, sends a message to the world that Hawaii is not a good place to invest because government will punish you and take the money away from you. With that kind of perception, Hawaii will continue to suffer a shortage of capital and investors. Having suffered through the economic doldrums of the 1990’s it is amazing how soon lawmakers forget!

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