The Psychological Nature of Real Estate Cycles
I have been through two previous Real estate cycles here on Kauai. Like this one, they are volatile, complex and persistent. They have pervasive effects on people’s livelihoods, wealth and health. I’ve always been fascinated with the question “What causes real estate cycles?” I read an article by a behavioral economist (Dick Stoken, 1993) that advanced the theory that crowd behavior and mass psychology was the culprit. Mr. Stoken argues that we are not economic individuals who act in our own rational self-interest. Rather, we are psychological beings, conditioned by our experiences, especially those experiences that serve as important lessons of pain and/or pleasure. Because of this, cycles are created: ‘‘Following an extended period of prosperity, men and women adopt the psychology of affluence and its byproduct, economic optimism, wherein they enjoy life, have fun, and become economic risk takers. This mass psychology of optimism, once set off, takes on a life of its own and continues until people become excessively optimistic. They rationalize that what has happened will continue to happen, and thus come to see less risk than actually exists. Consequently, too many people become risk takers, which in turn creates the conditions for a big bust. This bust, or depression, then sets off a psychology of pessimism which continues until people see more risk than really exists. At that point too many people become risk averters, and this lays the foundation for a long period of economic expansion.’ This seems to ring true to me. I’ve noticed that the abstract term “MARKET” actually refers to a general behaviour trend of consumers. As if an orchestra leader is conducting a symphony wherein everyone begins and ends each piece at the same time following ques and signals which the group collectively obeys.
Kauai MLS report Single Family Homes (Residential)
MLS report Single Family Homes (Residential)
# Residential real estate transactions completed/closed on the island of Kauai in 2007
408 Residential Listings for Kauai – Sold Date 1/1/2007 to 1/1/2008
# Residential real estate transactions completed/closed on the island of Kauai in 2008
181 Residential Listings For Kauai Sold since 1/1/2008 to YTD
# Residential real estate transactions completed/closed in the Princeville area YTD 2008
21 Residential Listings for: PINCEVILLE Sold Date since 1/1/2008 to YTD
# Residential real estate transactions completed/closed in the Poipu area YTD 2008
21 Residential Listings for: POIPU Sold Date since 1/1/2008 to YTD
Average price across the transactions in 2007 and 2008? $ 882,826 Average $635,000 Median
Garden Island News “Council Starts Tax Reform Work”
Council starts tax reform work
by Nathan Eagle – The Garden Island
Posted: Thursday, Jul 10, 2008 – 12:51:15 am HST
The county wants to make its real property tax system fairer and simpler for residents to understand.
After more than a year of working with various stakeholder groups, the late Mayor Bryan Baptiste’s administration hammered out a plan based on use earlier this spring.
The Kaua‘i County Council started its work on the proposed legislation yesterday at the Historic County Building. The seven-member legislative body indicated that the bill could see significant changes before it is passed, but for the most part seems on target to meet the county’s goals.
The bill would significantly increase the amount of tax revenue the county generates from buildings and land used for resort purposes while decreasing the burden on residential use.
The county’s IT manager, Eric Knutzen, shared some of the anticipated impacts of the tax proposal during a morning presentation to the council.
The county’s projected revenue in the residential category would fall $4.08 million, or 31 percent, while the amount of money in the resort category would jump $3.75 million, or 24 percent, he said.
Contained in the 147 pages of Bill 2274 is a plan that merges liberal and conservative philosophies of “pay as you go” and “ability to pay,” he said.
Knutzen served as the facilitator of the eight-member Real Property Tax Committee, which included the finance director, tax appraiser and ag land use inspector.
The current system is “very complicated,” he said. “There is a need for simplification.”
Baptiste, who died unexpectedly last month, said when he submitted the legislation to the council on May 30, that it would reduce tax rate classes from the current eight to four with a focus on use as opposed to zoning.
He said it aims to encourage housing availability, true agriculture, alternative energy production and the preservation of the island’s rural character.
When local taxes started spiraling out of control several years ago because of a rapid runup of assessed values, the council at the time reacted by passing legislation that has provided some $13 million of tax relief for the past three years, Councilman Jay Furfaro said.
These measures included a 2 percent cap on owner-occupied homes, a 6 percent cap for residents who put their second homes into long-term rentals and a circuit breaker law.
The proposed bill eliminates these pieces — which council members have said were temporary solutions — while boosting the current $48,000 homeowner exemption to $300,000.
Kaua‘i taxpayers with a cap now and an average size home would not see an increase; they would likely see a decrease, Councilman Tim Bynum said.
Under the new system, the methods used to assess land and building values would remain unchanged. Land values would be market-based, while building values would be calculated by taking the current cost to build minus depreciation.
But the tax rates for buildings would be three times higher than those for land, Knutzen said.
The ratio reflects the notion that buildings require more county services, he said, such as fire and police.
“We’re putting the emphasis and taxation burden on the building side,” Knutzen said. “The improvements on the land is really what drives the usage of county services.”
Tax classes would be redefined to group properties of like uses. The four categories would be residential, resource lands, general and resort.
Residential would include owner-occupants and long-term affordable rentals.
Resource lands would include conservation lands and farms, defined as a property principally used for food, fuel or fiber production. They would be valued at $5,000 per acre and increase annually with inflation.
General includes commercial, industrial and vacant lands.
Transient vacation rentals and timeshares would fall under the resort category, regardless of zoning.
If a vacation rental sits in a residential neighborhood, it will be taxed as a resort use under the proposed legislation.
Councilman Ron Kouchi said he is tired of the “hypocrisy” of residents wanting to take advantage of both worlds — those seeking to have permits to operate as a resort but pay residential tax rates.
Knutzen said there could be as much as $3.03 million of tax revenue that could be captured from vacation rentals. The county found 1,050 vacation rentals advertised online, but only 129 registered for such use.
Furfaro said he believes vacation rentals and timeshares should be in a separate category.
Council Chair Bill “Kaipo” Asing voiced some of his concerns over the proposed legislation.
He questioned the rationale behind some of the arguments Knutzen conveyed to justify various aspects of the tax proposal.
For example, Asing said the conservative “pay as you go” philosophy does not apply when Knutzen suggested larger homes should pay more taxes because they use more services.
Asing said there are many cases where more people live in smaller homes, using more services. So the liberal “ability to pay” philosophy would be a more appropriate argument.
Kouchi said the system presumes the owners of bigger houses have more money. It presumes the same for those living on the ocean where the land is more expensive and asks them to pay more because they can.
But there are exceptions.
Families who are long-time property owners of big estates or oceanfront homes “don’t fall into that category of the guy with a lot of money,” Kouchi said.
When legislating, it is the “best for the most philosophy,” he said.
Asing said he also has qualms about the proposed tax rates for land not being more.
He said he is concerned wealthy people may start “land banking,” investing their money in property instead of the stock market.
But the proposed tax reform is not a continuation of the national trend of “sticking it to the rich,” officials said.
Bynum said he has received a lot of mail from accusatory timeshare owners. He said the proposed tax system has them pay a fairer share, noting their use of county services.
Knutzen said the proposed system would increase their tax burden up to $128 per unit annually, or about $5 per visit. The estimated revenue increase under this proposal would be $236,195.
When compared to the average resident, Bynum said visitors put more miles on the county’s roads and may utilize the recreational facilities more. Plus, emergency services are available.
But he said he did not want to see it become unaffordable to the “once in a lifetime” visitors, such as those on their honeymoon.
Yesterday was Asing’s last regular council meeting.
The council on Monday unanimously selected him to serve as interim mayor until Dec. 1, when a new mayor elected by voters in a special election will be sworn in.
Plans are being made for Asing to be sworn in at a ceremony at 9 a.m., July 17, in the rotunda of the Mo‘ikeha Building at the Lihu‘e Civic Center.
A county news release says he will resign from his position on the council prior to the ceremony.
There will be a public hearing on Bill 2274 on July 30.
From there, the proposed legislation will go before the Committee of the Whole where the bulk of the council’s work will be done.
FROM Jim Pycha – jp@hiinfo.net
The Bill is attached to this Blog in its entirety.
