The Link Between Low Wages And High Housing Costs
Originally published in Honolulu Civil Beat, April 3, 2019
Charles P. Wathen
There are two sides to the affordable housing problem. One is building more units and the other is the low income of our residents.
Building more affordable housing depends on subsidies which are limited by both the federal and state governments. As a practical matter, Hawaii only gets enough funds to create 200 to 225 units a year.
Building a two-bedroom, two-bath unit costs $150,000 in federal tax credits and $100,000 in direct subsidies from the state for a three- or four-story walk-up apartment. For something with more floors that requires an elevator the subsidies would increase to cover the higher cost of construction.
Besides the financial problem it takes a long time to process and develop a property, up to five to seven years. To produce 2,000 units, it will take 10 years of available federal and state allocations of funds. These 2,000 units will have little effect on the tremendous demand we currently have of 60,000 units by 2030 for all islands.
The additional problem is finding entitled land, which is scarce in Hawaii. All counties in Hawaii could utilize the State 201H program to create additional land for affordable units, however, it is not being promoted adequately and it takes years to get an approval. For the long term, each county should build an inventory of 201H affordable housing sites for future needs.
The other side of the affordable housing crisis is an income problem.
Fifty percent of the population pays more than 50% of their income for shelter, which leaves nothing for necessities. This in reality is a social inequality problem and needs to be addressed as quick as possible.
By raising wages, it is faster and more efficient to solve the affordable housing crises than trying to create more units. Currently, numerous cities and states are increasing their minimum wage.
Minimum Wage Increase Debated
In Hawaii, the Legislature again is talking about raising the minimum wage, from $10.10 an hour to $15 per year by 2023. Between 2005 and 2018 the Legislature had raised its wages 83% while the consumer price index increased only 41% for a part-time job.
The increase in wages is effectively $60 per hour if they worked six months per year. The National Housing Low Income Housing Coalition estimates that wages in Hawaii should be $27.44 per hour to afford a one-bedroom rental unit. Seattle raised its minimum wage last year to $15 an hour, and in comparison, to Honolulu, the cost of living per hour for Hawaii’s minimum wage should have been $18.39 per hour in 2018.
You can take several cities and states and do the same type of comparison by the cost of living, and it will indicate that Hawaii’s minimum wage proposal that’s currently being discussed is deplorable. It’s a step in the right direction, but still not enough to house or feed our people.
In Honolulu there are about 16,000 individuals earning $10.10 per hour, 23,000 persons earning between $10.10 an hour and $15 an hour. Many of these people are within one paycheck of being homeless. Additionally, there are 62,000 persons who earn between $15 an hour and $20 an hour.
If you raise their wages by $5 an hour for those making less than $15 an hour, it will have some effect on raising the wages of those over $15 per hour, but on a declining scale. In other words, those between $15 and $20 will see maybe a $2 increase and so on until it doesn’t ripple through the economy.
Overall, increasing the minimum wage is a net positive event to the economy and all of Hawaii.
If you assume you raise the minimum wage $5 an hour for all wage earners earning between $10.10 an hour and $15 an hour and all of the additional $5 per hour went to pay rent, that would be an additional $876 per month for each worker and this would solve part of our housing crises overnight.
To put this in perspective, an extremely low-income, two-person wage earner household at 45% area median income ideally paying 30% of their income for housing is paying $1,054 per month. If you increase their wages by $5 per hour over the $10.10 they currently make, they could pay $1,917 a month ($1054 plus $876 equals $1,917) for rent.
They now would be paying 39% of their income for housing and they would also move up to 65% AMI. This kind of wage increase will affect those in the lowest income spectrum the most.
If you increase current wages with an additional $8 per hour our extremely low-income resident could afford the average apartment in Hawaii and could maybe afford a few essential necessities. Imagine the dynamic effect of individual wage earners combining their income as families or roommates and what they could afford.
Many believe that by raising the minimum wage it would harm small businesses, which is true to an extent, but experience shows that the businesses that find it difficult to increase wages are the least efficient. While this seems cruel, inefficient businesses will close sooner or later from competition. The public is currently subsidizing these businesses that pay low wages through all the social services our low-income residents need.
Over time the increase in the minimum wage is going to expand the economy and the increase in wages is going to come out of real estate rents.
There’s a long-held economic principle call the “land rent theory” that says, as wages are increased and if market prices don’t go up (because of competition), the increase in wages will come out of the land. The opposite is also true: The higher the rents, the lower the wages, which brings us back to one of the causes of a lack of affordable units.
In 2016 and 2017, Hawaii ranked No. 1 in the nation for having the widest gap between wages and the price of rental housing by the National Low-Income Housing Coalition’s annual report.