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What will be the effect of Honolulu’s vacation rental Bill 89? What will happen and when will vary based on individual circumstances of each owner.

There are four possible scenarios for an owner: They can take the unit off the market, rent it long term, sell the unit or try to illegally continue renting the unit.

All of these alternatives will cause a financial loss.

How big the loss will be is an important question. The worst situation results when a large number of these owners decide to sell or rent their units long term at the same time and flood the market.

Each submarket is going to react differently depending upon how many units come to market by type and price range. This situation can be exacerbated by the number of new units at all price points that are coming to market for sale.

There is a very simple real estate principle that “all forms of housing are linked in a chain of substitution, and there are only qualitative and quantitative considerations.” An exception generally is the high-end vacation units which dance to a different drummer and are hard to forecast or predict responses to local intervention.

In other words, a new million-dollar condo with three bedrooms and two baths competes to a certain degree and affects the price of a 10-year-old $500,000 unit with two-bedrooms and one bath depending on how many units are on the market, personal needs and ability to pay.

How The Market Will Change

That being said, everyone should expect some kind of ripple effect in the Honolulu housing market. There is no question that affordable units for sale and for rent will increase for the public and this just might be one of the biggest non-subsidized housing initiatives.

We did a study last summer of condo prices and rents in the urban core that showed condo prices going up 5% per year but rents only increasing 1.5% for the last five to 10 years. Rents have never kept pace with price appreciation which is the main investment return.

The condo rental market is disorganized and unprofessional people buy them for many reasons, but least of all for cash flow. For example, an average existing two-bedroom two bath condo selling for $678,000 has risen in value 25% (five years) but only rents for $2,200 per month, which is a 7.5% increase.

That same unit as a vacation rental generated $3,500 per month only rented 15 days a month, and at 25 days generated $5,800. Looking at vacation rental websites, we have seen many units that could be generating far more revenues.

On an annual basis, the financial loss of income is going to be tremendous. Just think about it: What if an owner over borrowed on this income or bought too many units?

I don’t see rent dropping that much. Stay tuned and watch the market.

No one has a crystal ball or is good enough to forecast what is going to happen when it comes to knowing what actions individual owners will take and when. I will say from my 30 years of analyzing markets all over the country that this reminds me of an overbuilt market.

How severe it will be this time depends on how many units come to market by location and type of unit. Some have commented that sale price could drop 15% to 20%.

On the other hand I don’t see rent dropping that much. Stay tuned and watch the market, and if you can hold on and be patient, this will pass.