by Sophie Calder-Wang, Chiara Farronato, Andrey Fradkin
February 15, 2024
Summary.
Concerns that short-term rentals fueled by platforms like Airbnb have caused long-term rents to rise in major cities has caused some governments to place limits, including bans, on them. But research of New York City found that short-term rentals are not the biggest contributor to high rents, especially when it comes to the most vulnerable segments of a city’s residents. Given that short-term rentals have benefits, bans are a poor solution.
Cities around the world have seen rising house prices and rents and an influx of tourists over the past decade. Over the same period, an increasing number of travelers have been using short-term rentals, enabled by digital platforms like Airbnb and VRBO. These coinciding trends have led residents to blame rent increases on Airbnb and politicians to pass laws restricting the availability of short-term rentals. Short-term rental laws vary, with the most stringent resulting in almost complete bans. That’s the case in New York City, where Local Law 18 now requires hosts to register with the city, be present in the residence while hosting, and host at most two travelers.
Despite fears that Airbnb may lead to rent increases, our research has found that short-term rentals are not the biggest contributor to high rents, especially when it comes to the most vulnerable segments of a city’s residents. Put simply, restricting Airbnb is not going to be an effective tool for solving the housing-affordability problems in many U.S. cities.
Governments wishing to ensure that Airbnb won’t further reduce housing affordability in the future can design regulations to preserve many of the benefits of short-term rentals to city residents and tourists alike, while limiting the negative spillovers on renters. In this article, we will describe how to do so.
Minimal Impact
The exponential growth of Airbnb, combined with building restrictions that have severely limited the growth of housing supply, have led to the widespread perception that short-term rentals must be swallowing housing units at the expense of local residents, who now face higher rents. One of us (Sophie) has studied this issue in the context of New York City, arguably one of the most successful Airbnb markets and one where the housing supply is constrained by regulation and even geographic constraints like the ocean. Her finding: The presence of short-term rentals increases the annual rent of the median tenant by $125. While this aggregates to a material sum across all renters, it is dwarfed by the overall rise in housing costs in the recent past. Considering that the average rent in New York City was over $1,800 per month in 2021 and that rents had increased by 32% over the previous decade, our findings imply that Airbnb contributed to about 1% of aggregate rent growth.
Many city governments are interested in whether short-term rentals disproportionately affect more vulnerable segments of their population — for example minorities or low-income residents. But our work has found that the increase in rents in New York City is more concentrated among high-income, educated, white renters and not the population city governments are, in general, concerned with. This is because short-term rentals tend to be concentrated in touristy, centrally located areas where higher-income residents live.
Overall, it’s much more likely that the tight housing market in major cities is a bigger contributing factor to increases in annual rents than short-term rentals.
The Benefits and Costs of Short-Term Rentals
Even if short-term rentals were to blame for the increase in rents, is a ban the best solution? To answer this question, it is necessary to understand and quantify the benefits that short-term rentals create for tourists and resident hosts.
Let’s start with the tourists. It turns out that in most cities, there isn’t a constant number of travelers who seek accommodations throughout the year. Seasonality, special events, conferences, and holidays make the demand for accommodations highly variable.
Hoteliers structure their business for a fixed capacity and invest in facilities that are available throughout the year: conference rooms, gyms, and guest rooms are open to guests 365 days a year, rain or shine, peak or low season. That’s a great way to supply a stable number of customers, because it leverages substantial economies of scale. But it results in price spikes during peak demand periods since so many potential travelers are all competing for a limited number of rooms.
Enter short-term rentals. At least in their original form, hosts would leverage a property they already had available. Perhaps, it was a property whose owner would leave for extended periods of time or one that had an extra room for friends and in-laws to occasionally stay in. These types of rooms had two key features. First, they were more likely to be available in peak demand periods, expanding supply when travelers wanted to flock to a city. Second, at least some travelers were willing to stay in a stranger’s home.
Two of us (Andrey and Chiara) quantified the benefits of this flexible supply entering the hotel market in major U.S. cities. To tourists, the benefits are quite substantial: $91 per Airbnb booking in today’s dollars. Half of those benefits come from expanding choices and the other half from lower prices for rooms in hotels, which face greater competition. While lower accommodation prices benefit the large number of hotel travelers, the expansion of choice is particularly beneficial to Airbnb guests who value privacy, locations, and home amenities that standard hotel rooms are unable to provide. Imagine a family with young children visiting the grandparents for the holidays. They want to stay in a residential part of town, in a place with a kitchen and laundry. This type of accommodation is not often offered by hotels.
What is also interesting is that the benefits to travelers don’t uniformly apply to all places and days of the year. They are concentrated in periods of high demand — what the hotel industry calls “compression nights” — in cities where the hotel supply is highly constrained relative to the demand for rooms — like New York City on New Year’s Eve. In those periods and locations, the benefits to travelers amount to more than $130 per Airbnb booking.
Hosts benefit as well, because they can monetize their assets to increase earnings or smooth income fluctuations. Holiday travel patterns seem especially conducive to a win-win for hosts and travelers. Hosts who want to go on vacation during the holiday period can rent out their homes to travelers who want to visit their city during the same time. This is particularly valuable to lower-income households, who tend to host on Airbnb on days when demand, and thus prices, are especially high.
The losers are the hotels that see their revenues and profits decline. However, the benefits reaped by tourists and hosts vastly outweigh the losses suffered by hotels. Indeed, we estimate that at least half of Airbnb bookings — and 70% of those in New York City — are not lost sales for hotels: Those travelers would not have booked a hotel if Airbnb hadn’t existed — and not necessarily because they don’t like hotels, but rather because, when they wanted to travel, hotel rooms were sold out or too expensive.
Travelers not only demand accommodations for the night but also a host of additional services, from food to transportation to entertainment. Although the evidence is a bit more limited, it appears that the additional influx of tourists benefits local businesses, which, in turn, may lead to higher local employment.
An Unknown: The Impact of Short-Term Rentals Operated Like Hotels
Residences that are operated exclusively as short-term rentals have become increasingly common. This form of supply is most concerning for the rental market, because it has the potential to remove a large share of the housing stock devoted to long-term rentals. It can also reshape the composition of a local neighborhood, creating negative effects such as the replacement of nurseries by restaurants and the erosion of the historical neighborhood feel.
While this has happened in some cities, most notably Amsterdam and Barcelona, we have no evidence that this is actually the case in New York, which was already a major tourist attraction before Airbnb came to town. Indeed, the number of housing units devoted to short-term rentals in New York is less than 2% of the overall housing stock rented out to long-term tenants and ranges from 4% in the most popular neighborhoods to almost zero in the least popular neighborhoods.
The Optimal Regulations
Given the large widespread benefits and the limited concentrated costs of short-term rentals, how should cities regulate short-term rentals? By striking a balance, so that travelers and hosts gain without short-term rentals overwhelming entire neighborhoods or significantly reducing the housing units allocated to long-term renters. This can be accomplished with limits — rather than outright bans — on when and where housing units can be rented out to travelers.
Limits on when units can be rented out on a short-term basis can take the form of caps on the number of nights for which a property can be rented. For example, in London short-term rentals are capped at 90 days per year; in Amsterdam the cap is 30 days. Because travelers mostly benefit from Airbnb in periods of peak demand, allowing them to book short-term rentals in those periods seems especially valuable. At the same time, it allows occasional hosts to take in extra earnings during periods of high demand, while making it much less profitable for investors to take units away from long-term renters.
Limits on where housing units can be rented on a short-term basis often take the form of caps on the number of neighborhood-specific licenses for such rentals. For example, in San Diego‘s touristy Mission Beach neighborhood, the city has imposed that no more than 30% of housing units can operate in the short-term rental market. In other parts of San Diego, the limit is as low as 1% of housing units. These limits are imposed by requiring residents to apply for licenses to operate in the short-term rental market.
One concern with these forms of regulations is how to enforce them. After all, most cities don’t have resources needed to investigate the permissions of each short-term rental. The remedy may be to make it easy for regulators to monitor short-term rentals by requiring intermediary platforms like Airbnb and VRBO to disclose the necessary information to city governments and directly enforce the regulation. Both platforms collect detailed information on each transaction and can remove properties that lack a valid permit or exceed the maximum number of nights.
It is unfortunate that cities like New York have sided with the hotels in banning short-term rentals altogether. Caps like those we have recommended let cities reap the benefits of short-term rentals, while avoiding the harms.
