HONOLULU -- After living for 16 years in paradise, Brian Nicol, the editor and co-publisher of Honolulu magazine, called it quits and moved last month to Eugene, Ore.

Part of the draw was the challenge of a new job. But the inability to buy a home here was also a crucial factor. With the median price of a home in Oahu surging in June to $350,000, the 45-year-old journalist realized his dream of home ownership had faded into the sunset.

"My friends and acquaintances say the same thing. They just can't buy a house," said Nicol, who has always been a renter. "There's definitely a melancholy mood. It's one of sadness to see. So many possibilities are impossibilities."

Nicol, who has a wife and two children, isn't alone in his decision. The high cost of living is driving people to the mainland, where their buying power and job prospects will be greater.

"They are leaving," said Honolulu Mayor Frank Fasi. "I get letters all the time from people -- three to four a week, with more coming in."

The departure of people to the mainland is nothing new to Hawaii, where the high cost of living has been a fact of life for years.

What's different now is that these departures are occurring against the backdrop of a rapid run-up in housing prices that are already the highest in the nation. Many people blame the flood of Japanese investment in the islands.

"Young people are recognizing the good life is not theirs here," said Fasi. "They are beginning to recognize that we are becoming a land that only the wealthy can afford to live. Our children and our grandchildren are becoming caretakers and tenants on land they should be living on as owners."

This is happening at the same time Hawaii is basking in prosperity. Thanks to a tidal wave of foreign investment since 1985, the state's two largest industries -- tourism and construction -- are booming.

Foreign investment has been the decisive catalyst propelling economic growth, with the lion's share of overseas capital coming from Japan.

Since 1985, when a revaluation of the yen effectively marked down U.S. assets to bargain prices, Japanese investors have been on a shopping spree in Hawaii, snapping up hotels, shopping centers, office buildings and luxury homes.

From 1986 to 1989, Japanese investment in Hawaii averaged $1.6 billion annually compared with an average of $168 million annually from 1980 to 1985, according to state figures.

One only has to look at Waikiki to see how Japanese investment has transformed the tourism industry. Japanese investors have taken over older hotels like the Halekulani and Moana and pumped in money to refurbish them.

"The Japanese operate at a negative cash flow that no American company would tolerate, and they have forced other American-owned operators to sit up and struggle," said David Ramsour, chief economist for the Bank of Hawaii. "The whole industry in Hawaii has been revolutionized by the Japanese in the last five years."

Even before the heavy influx of foreign investment, owning a house here was an expensive proposition because of extremely tight state controls that limit the amount of land available for urban development.

Out of 4 million acres of land in the state, less than 5 percent has been released for urban development by the state Land Use Commission. The rest is zoned for agriculture and conservation.

No one has made more of the issue than Mayor Fasi, who vehemently opposes foreign purchase of island homes for speculative purposes. The mayor has criticized Japanese investors for "exacerbating" an already tight housing condition.

Others like Ramsour of Bank of Hawaii argue that the Japanese should not be made the scapegoat for escalating home prices. Rather,he said, the problem is decades old and the result of a tight-fisted land monopoly and a frustrating, several-year-long housing permit review process.

He blames speculation rather than Japanese investment for climbing housing costs. Purchases by Japanese "involved about 500 homes out of a population of 250,000 homes, and they displaced 500 to 1,000 families who had to go somewhere else in the system. That couldn't have been the force that drove the prices of all the rest of the houses up."

Nonetheless, escalating home prices and the squeeze on the housing market have underscored the critical need for affordable housing throughout the state.

State officials estimate that 64,000 affordable homes need to be built by the year 2000. (Affordable is defined as within the reach of households making 80 percent to 120 percent of the median income, which is $41,200 in Oahu.)

To help meet that goal, the state is requiring developers to buy or pay for some new units, and it is heavily subsidizing other units.

Critics, however, are skeptical that those goals can be reached. "Both the state and county are doing too little now," said Fasi. "We need right now on this island alone 40,000 to 50,000 units and we're roughly doing 1,500 units a year. Why? Because {the construction} industry is working on hotels, golf courses, commercial developments and office buildings."

The influx of foreign money has made growth management a major concern for state officials.

Gregory Y. Pai, special assistant on economic affairs for Gov. John Waihee, said, "Japanese capital is coming in at a rate of $1.6 billion a year. That's an enormous size relative to our state gross product of $23.6 billion. The problem is not attracting money but to control it so that it doesn't overwhelm our economy."

Pai believes economic diversification is crucial to Hawaii's future. "We have to diversify our economy to create better jobs that require higher skill requirements and are more productive for the highly educated local work force," he said.

Failure to do so will fuel the exodus of highly educated, trained workers to the mainland. "We have seen a problem with those who are highly educated with master's degrees and doctorates not being able to get jobs that they are trained in and not being able to afford the high costs of living here," he said.

"If we continue to lose them through this sort of brain-drain process, we'll become a totally service-oriented economy with no balance as far as any kind of middle class or any kind of educated local population. They will just continue to leave, to leave."