Will the Higher Cost of Paradise End—Or End Up Ruining Hawai‘i?
We‘ve all been feeling the hit at the register, the pump, in the housing market. Economists tell us which price inflation is normal, and which things are just a blip.
Oh what a beautiful morning, especially in Hawai‘i, where you can start every single day in sunshine instead of having to turn up the thermostat. Nothing like saving money without having to raise a finger!
Unfortunately, that is almost the extent of your savings. OK, you don’t have to pay Kelly Slater $450 for each artificial wave at his California Surf Ranch. And that famously expensive (and stinky) fruit, durian, is relatively cheap here—you might pay $90 for one in Chinatown that would go for $135 on the mainland. But we have historically paid a price for paradise and until the pandemic lowered the boom in March 2020, we tried to remain morbidly cheerful, almost proud of the sacrifices we made to cough up $3 per gallon at the pump or watch from the sidelines as the price of a single-family house in Hawai‘i hit a median of $599,000—a cool $700,000 on O‘ahu. It even made us feel kind of rich. Well, kinda sorta.
While those housing numbers (from 2015) would rise at a steady 4% or so every year, gas would actually stay lower than the all-time Honolulu high of $4.87 in April 2012. We all knew we paid more for milk, eggs and utilities. But things sort of balanced out; maybe not really, but psychologically, especially after you scored a sack of lychee for $4 or polished off a loco moco for the same price. Who could ask for more? Hawai‘i people had a sense of equilibrium.
And now it’s gone. The question on everyone’s mind: Why does it feel different this time? This can’t be forever inflation, can it? It will go down, right?
The short answer is no. But that shouldn’t surprise. “‘You have to live in a cave not to know there is an inflation target,’” says Paul Brewbaker of TZ Economics, quoting a statement from the late Edward Gramlich, a Federal Reserve governor, in a call with Hawai‘i banks in the 2000s. “We expect it to maintain a 2% average a year. There’s been a period when it’s been at or below that for some time, so now you should expect it to be at 2% or above.” Since core inflation numbers exclude the food and energy sectors, the actual pain we feel at the register or pump is usually much higher.
In a best-case scenario, the institution that controls the flow of money in the U.S., the Federal Reserve, would have eased us from years of artificially low inflation that began in 2009. But politics and a wifty economic recovery got in the way. Then the pandemic struck and the economy slipped its leash. Now a desperate Fed is planning to raise interest rates two or even three times in 2022.
Hawai‘i was already among the top three most expensive places to live in the country because of its isolation and distance from manufacturing, distribution and refining centers. Our inflation rate typically exceeds that of the mainland by under half a percentage point, while our economic growth lags a point behind. Our main industry is mature; no matter how many tourists arrive, their rate of spending keeps falling and our boats float a little lower. Laborwise, the state was saddled with a monolithic employment structure based on the plantation society, which allowed employers dictatorial powers to keep wages and salaries low and politicians in their pockets. Subsequent generations pleaded the high cost of doing business to maintain the same kind of captive pool, who, pre-pandemic, worked two and three jobs to barely get by.
But even college-educated workers make far less here than on the mainland, hence the cries of pain when the current inflationary spike of 5% and 6% (in 4Q 2021) roared out of a perfect storm of factors, juiced by a government gusher of cash.
But guess what? To Brewbaker it’s all a blip. “People got concerned about inflation because we haven’t had it for a while,” he says. Still, the effects of this particular high-inflation blip over the past two years have shown us a different side of the Hawai‘i we are all used to. This pandemic was a game-changer, a broom in the system, a hurricane-force shredder of private sector jobs that left the newly jobless to fend for themselves. High inflation is the straw that breaks locals’ rice bowls.
Hawai‘i housing is the new order’s perfect poster child. “There’s very little building going on here,” says Shannon M. Heaven, president of the Honolulu Board of Realtors. As remote workers and lockdown claustrophobics on the mainland alike saw Hawai‘i’s low COVID-19 counts and warm climate as reason enough to dive into the market, often sight-unseen, locals were priced out. Rentals were sold out from under the struggling working poor who hadn’t already been displaced by vacation rentals. “The number of home sales during the first nine months of 2021 (19,240) was already higher than the average annual home sales during the past 13 years (18,751),” says chief state economist Eugene Tian. “I know mortgage lenders who have left Hawai‘i for San Antonio” for lack of business, confirms Heaven. “A lot of places can build their way out of a shortage, but we don’t have that luxury. We’re confined to an island.”
Says economist Brewbaker: “There’s a weird housing situation here, a single-family home bubble in which condos did not participate, a bubble very specific to detached dwellings, which is understandable in a public health context and given the remote work phenomenon.”
So if it’s a bubble, that means it will burst, right? Like in 2008? Isn’t this good news? “I’m not saying single-family home prices will collapse,” he replies. “I’m saying we got to a million a little early. We were going to get to $1 million for a single-family home in 2025 anyway.”
The median price of a single-family home in Honolulu hit $1.05 million in August 2021.
“He predicted that a long time ago, Paul Brewbaker,” says Heaven. “The thing about Hawai‘i is we maintain our value. If we see it dip, it comes back.” Even nationally, she says, “this is not a bubble, according to our national board economist, Lawrence Yun. But it’s been a pretty intense two years.” Her recent sales have come from military-owned homes whose owners were transferred to other postings, but none from established neighborhoods such as Moanalua. “People who grew up there want to move back and there’s nothing.”
And in 10 years? “I think we’re still going to have a really strong economy,” she says. “The market may plateau, but if you put your money in Hawai‘i it will always add value. Put it in the stock market and it may go to zero.
“Once you’re in it, it’s a good investment to have,” Heaven adds, leaving unspoken the rest: If you’re not in, you just might be too late. The upshot? We’re moving to a condo society like Singapore and Hong Kong. (Late-breaking data on condos showed 2021 sales surging and the average price up 21% or $75,000.)
All this presupposes that no Black Swan event takes place, such as a different pandemic, a Category 5 hurricane (2018) or the contamination of 80% of O‘ahu’s water by, yes, jet fuel.
SEE ALSO: Can We Ever Eat All Local in Hawai‘i?
Toilet paper, masks, hand sanitizer. … Eggs, milk, meat. … Inflation affects everything. For September 2021, inflation was 5%. State economist Tian says they projected 4.1% for 2021 and 2.9% for 2022. Now you know why Starbucks raised its prices twice in the first 18 months of the pandemic—variously from 5 cents to 20 cents a cup—and weighed switching from Arabica to cheaper robusta coffee; and why Folgers, Hills Bros. and Maxwell House cost more than $7 a can, two and three dollars more than on the mainland. It’s why gas at the pump went from $3 to $4-plus (and $6 on Lāna‘i and Moloka‘i). Why Keith’s Cookies cost 75 cents more per pouch at the KCC farmers market.
Our inflation starts with oil. “When the price of oil increases, everything increases,” Tian says. “We use oil for energy and to transport our commodities, since the things we purchase here are mostly imported—85% to 90% imported.”
The cost bit family-owned local beef producer Kuahiwi Ranch on Hawai‘i Island. Though well-known for its grass-fed beef, Kuahiwi usually hedges its market risk by sending half its herd to the mainland, where it subsists on commercial feed. This time the hedge hit back when mainland processing plants locked down and Kuahiwi’s stranded cattle had to be fed for weeks longer than expected. At the same time the price of feed went up, beef price per pound per hundredweight fell from $1.30 to “the $1 mark, which is the point where you’re just breaking even” for the mainland cattle, says Kuahiwi’s Michelle Galimba.
Oil inflated the price of tires at Lex Brodie’s Tire, Brake and Service Co., but at least the company had plenty in stock. “We actually saw something coming at the end of January and the beginning of February (2020), as the virus was being identified,” says CEO David Sands. “And we said, ‘Well, we better double up on our orders now.’ We did order a lot of tires and we had inventory that showed up at the end of March. You really couldn’t order tires after that.”
Galimba and Kuahiwi also caught a break on the other end of the oil spike and shipping disruption. “Mainland beef prices have gone a little bit crazy in the last couple of months,” she says. “I haven’t raised my prices at Foodland, so my prices are actually lower. Now it’s actually cheaper to buy local grass-fed. I was thinking about raising the price and went to stores in October to meet managers, which I hadn’t done in a long time, and one said, ‘You aren’t going to raise your prices, are you? Because it’s flying off the shelves!’”
Like local beef, used cars have become one of the new currencies of the realm, says Sands. “There’s virtually no new cars available on O‘ahu. People are keeping cars longer and maintaining them better, which obviously is good for us. Anybody that wanted to buy a new car last year or this year probably didn’t. Who knows when they’ll be available.” In Arizona recently, he visited a Lexus dealership that had only six cars on a lot, with back orders for hundreds. “I don’t see this changing for a long time.”
So if homes are now pie in the sky and inflation is here to stay, what are we left with besides more expensive omelets and smaller loco mocos? A volatile labor market, says state economist Tian. “It’s behaving very strangely. For the first time, to my surprise, we have more openings than people to fill them. In August (2021) we had high Delta COVID numbers and after the governor announced that people should not feel encouraged to come here tourism decreased 27%. In September we had fewer job openings and more people quitting their jobs: 58,000. That’s very high. In the past, we’ve only had 20,000 separations in a month.”
The Great September Dropout “is a very special situation,” Tian says. Now, “workers are one of the factors limiting economic growth. More people are leaving the labor force, or retiring, or moving out of the state, or just don’t want to work. That will impact the next year (2022). The cause may be because household income is up due to government payments. Fear of the virus is a reason, health care is another.”
This, too, might turn out to be a blip.
But lend an ear to Nico Chaize, an actual boss, owner and job creator, whose Nico’s Pier 38 restaurant survived by selling sushi grade ‘ahi in its parking lot for $3 and $4 a pound. Here’s what he says happened when lockdown was lifted: “We’d had to lay off 150 people in March 2020. That was rough. When we reopened slowly with table service, we had to bring back the team. We had a lot of people quit, it was an in-and-out situation, many people decided they just didn’t want to work in the restaurant industry anymore. We had to retrain new people, over and over again.
“Then summer of 2021 arrived and we’re fully reopened. And Hawai‘i is pretty much a shit-show for restaurants. It was too much too fast.” Indeed, more visitors came in August 2021 than in August 2019. “They were a very, very different clientele, less Asian tourists, more mainland people—what you call the cheap tourist, maybe more rude, coming from a state with no regulations on masks and social distancing. As a friend said to me, these are all the people who go to Cancun.
“I didn’t have enough workers at the time to do the volume. We were trying to make some money back from all the craziness. We pushed ourselves, myself included; I’d work nights, cutting fish, just buried in work. People quit. I could’ve. We made it through. Finally things slowed up in September. Today we are still looking for labor. There is a big labor issue. I talk to restaurant people around the world, in Chile, in France, everywhere. People don’t want to go back to work, to do service industry work. Doesn’t matter if there’s government money or not. And that’s the situation.”
Chaize has both the Pier 38 and Kailua Nico’s back to normal, doing 2019 business, but as of December couldn’t find a team to staff his fine-dining branch, Nico’s Upstairs.
Honolulu’s largest bread producer, La Tour Bakehouse, went through a similar 0 to 60 restart, only worse, because in addition to its well-known Ba-Le bakeries and La Tour Cafés, the company supplies nearly every major airline that flies to Hawai‘i, says Rodney Weddle, vice president of culinary innovation and executive pastry chef. “Our daily output of all our bread is about 30,000 to 40,000 pounds a day, the majority of that pan bread. First we cut it in half in March 2020. Then we had to bring it back, no warning,” when the airlines started flying again.
“The main thing was finding staff,” says Weddle. “It was a good thing our core staff stuck with us. But as business came back, trying to find people who would work was difficult. Our wages definitely went up; we’ve had to pay more to keep them.”
And this may be the lasting takeaway: We have to pay more to keep them. And do more than pay more. Otherwise, says Tian, “If the government doesn’t do any management, doesn’t provide affordable housing, set a residential tax rate, rent controls, they’ll go to other places like Florida and Arizona. Then we’ve lost our labor force. Without labor our economy will be limited.”
Understatement of the year?
Tian’s boss at the Department of Business, Economic Development & Tourism, Mike McCartney, let Tian do much of the talking (aside from an occasional nudge) up to this point in the interview. Now he speaks eloquently and at length—see the full conversation here—to sum up what Hawai‘i owes its citizens: “We need child care, affordable housing, health care, education, broadband and infrastructure. Those are important fundamentals that the state and county are going to have to pursue going forward. … We’ve all been good at getting our share of the pie. But now we gotta remember how to bake pies.”
“More pies,” says Tian.
“Instead of just taking our piece and walking away,” adds McCartney.