Airbnb (no longer?) pushes up house prices and rents

Economic opinion

The rise of home-sharing platforms like Airbnb has prompted concerns about its impact on urban housing markets. These concerns have focused on the detrimental impact the new trend may have on housing supply, as it creates shortages in long-term housing due to short-term rentals. In the literature it is found that this drives up house prices and rents for local residents, because total supply of housing is inelastic in the short run. With the pandemic now hitting the home-sharing sector severely, many hosts switch to long-term rentals, which may well add to a reversal of the strong price trend seen in urban areas in the past. In the medium term, the sector will adapt to the new environment, likely resulting in more segmentation between short-term and long-term markets. 

Only a decade ago, travellers usually stayed in professionally-run hotels. Home-sharing platforms like Airbnb, HomeAway and Couchsurfing have changed this habbit. They made it easy for homeowners to list their spare rooms or apartments online and enabled private homes to compete in the travel accommodation mix. Their rapid rise was part of a new trend - the sharing economy - taking off. Although the industry is rapidly developing and new competitors are entering the market, the best-known and most successful provider at the moment still is Airbnb. As of 2019, Airbnb users booked 187 million nights, from 25 million in 2015. That year, the company offered some 7 million properties in over 85,000 cities across the world. The US has the most listings, followed by France and Italy. The most popular cities are Tokyo, Paris, Osaka, New York City and London. Airbnb’s market share has risen dramatically since it was founded in 2008. Statistics from 2019 estimate that Airbnb accounts for roughly 20% of the global vacation accommodation industry. As such, Airbnb has more total listings worldwide than the top 5 hotel brands combined.

Relocation of housing supply

As every new trend, home-sharing platforms like Airbnb do not only have their positive but also negative aspects. One major concern often expressed relates to the limited regulation of the sector, resulting in e.g. the absence of a level-playing field with the hotel industry, a lack of consumer protection and a loss of tax revenue. Another big criticism is that home-sharing services are taking housing off the long-term rental market, thereby contributing to a decrease in available housing for local residents. Because the total supply of housing is fixed or inelastic in the short run, this could drive up residential house prices and rents to unaffordable levels.

Whether or not home sharing increases housing costs for local residents is not so easy to conclude. There are reasons why it might not. First, the market for short-term rentals may be  small relative to the one for long-term rentals. If so, even large increases to the short-term market might not have a measurable effect on the long-term market. Next, often segmentation exists between the short- and long-term markets, as short-term demanders have different needs than long-term demanders. The former often only need a bed and a bathroom, while the latter require extra rooms like a living area and a kitchen. Due to this segmentation, marketplaces for short- and long-term rentals often remain separate, with prices in the short-term market typically being higher than in the long-term market. Finally, it is possible that home sharing simply does not cause much relocation from the long-term to the short-term rental stock. Owner-occupiers may supply the short-term market with spare rooms and cohabit with guests or they may supply their entire home during temporary absences. In these cases, homes would not be made available to long-term tenants independently of the existence of a home-sharing platform.   

Measuring the impact of home-sharing platforms on house prices and rents empirically is not straightforward, as the housing market is affected by many other factors such as economic, financial and demographic trends (e.g. the development of household income, interest rates, the number of households...). There are academic papers that control for these trends and isolate the part of housing costs that is driven only by changes in home-sharing supply. Most of these studies focus on the US market and find the impact of home-sharing platforms on the housing market to be significantly different from zero. For example, a very recent paper by Barron e.a. (2020) found that a 1% increase in Airbnb listings is causally associated with a 0.026% increase in house prices and a 0.018%1 increase in rental rates. These effects may seem small, but they are not when considering that Airbnb’s annual growth is very large. The researchers calculated that, in aggregate, the rise in home sharing through Airbnb contributes to about one-seventh of the average annual increase in US house prices and about one-fifth of the average annual increase in US rents.

For Europe there is less research available, but a tentative exercise we made illustrates that here an impact of home sharing on house prices is likely as well. Figure 1 plots the increase in Airbnb listings per 1,000 inhabitants between 2016 and 2019 in 18 major European cities against the increase in the price of new dwellings in these cities during the same period. The choice of cities is determined by the availability of data for the two variables. Although a positive correlation is seen, we should be cautious however in interpreting this as a causal relationship. Property prices in big cities indeed are strongly determined by the cities’ general attractiveness as a place to live in, to visit as a tourist and to do business in. A large presence of home sharing is just one item in this, among many others (e.g. presence of expats, second homes...).

Concern over home sharing’s impact on housing affordability for local residents has garnered attention from policymakers and has motivated various cities, popular ones especially, to impose stricter regulations on home-sharing platforms. Some cities e.g. have chosen to impose a cap on the rental period by requiring property owners to still occupy their residential unit themselves for a minimum number of days per year. Other common forms of restrictions are imposing a minimum rental period for private residential properties or requiring hosts for a business licence or permit to operate in the home-sharing business, helping the regulator to control the type of players and sector growth rate.

Challenges post-Covid-19 

While these restrictions may be appropriate for particular urban areas, one may not forget that often the net welfare effects of the home-sharing sector are still (strongly) positive. Among the benefits are the creation of new income streams for residents and local businesses, the efficient use of underutilised homes, lower prices and more diversity and choice for tourists... Hence, any regulation should be well-though-out. This is particularly so given the impact of the current pandemic. Home-sharing platforms have been hit severely by the Covid-19 crisis. E.g., at the pandemic peak in spring, new Airbnb bookings were down 85% globally. Many hosts in major cities switched to long-term rentals as the short-term vacation market collapsed. In the short run, this could well add to a reversal of the strong house price trend often seen in urban areas in the recent past. 

An important question for the home-sharing sector in the medium term is whether travel will ever look like it did before the pandemic broke out. One can expect that, once the pandemic crisis is over, the home-sharing trend will survive, with hosts adapting to the new environment and focusing more on specific needs of guests (e.g. stringent cleaning protocols, smaller residences, a shift to more rural places...). It is likely that this will increase segmentation between the short- and long-term markets. If so, the impact of the home-sharing industry on housing costs for local residents would become less marked. Wait and see what the future will bring...

1See Kyle Barron, Edward Kung and Davide Proserpio (October 2020), “The Effect of Home-Sharing on House Prices and Rents: Evidence from Airbnb”.

 

Disclaimer:

Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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