How Airbnb Pushes Up Rental Rates—and Home Prices
It used to be that real estate was either a residence or an investment at any given time, but that standard is now history. In today’s world, what looks like a house can be both where you live and where you book overnight guests. Guests who pay, that is.
This seems like a plain and simple system that turns idle space into revenue-producing real estate, but the reality is more complicated: short-term rentals may be forcing up both rental rates and home prices, increases that aggravate general affordability problems.
A recent study by economists Kyle Barron, Edward Kung and Davide Proserpio found that when Airbnb listings increase 10%, rental prices increase 0.42% and home prices increase 0.76%. These may not seem like big numbers, but for marginal renters and buyers, any increase produces affordability worries.
“We hypothesize Airbnb takes supply out of the long-term rental market, which caters to residents looking to rent permanent homes, and reallocates it to the short-term rental market, which caters to tourists or other temporary visitors,” Kung explained in an interview with The Wall Street Journal. “This reduces the supply of long-term rental units and increases the price for residents looking for long-term housing. Home prices rise with rents.
“Airbnb enables homeowners to generate income from their property, making their homes even more valuable.”
Airbnb: A New Resource for Middle-Class Families?
The growing home-sharing industry—which includes Airbnb as well as such other hospitality platforms as Flipkey, HomeAway and VRBO—has certainly been welcomed by millions of homeowners and short-term travelers. The idea that this new concept is pushing up home values and rental rates will hardly be seen as a negative in many quarters. Indeed, Airbnb says it’s “a new resource for middle-class families.”
The catch is that real estate prices are something of a zero-sum game. As prices rise, homes become less affordable and marginal buyers lose out. In the rental market, rising lease rates—especially in high-cost metro centers—limit the ability of some would-be tenants to live on their own or even together. One of the reasons so many adult children are moving back home is that the rent really is “too damn high.”
“Solid economic conditions and millennials in their prime buying years should be translating to a lot more sales to first-timers,” according to Lawrence Yun, chief economist of the National Association of REALTORS® (NAR), “but the unfortunate reality is that the nation’s homeownership rate will remain suppressed until entry-level supply conditions increase enough to improve overall affordability.”
Two Sides of the Airbnb Coin
But affordability, like rising home prices, has two sides (at least). Airbnb claims in a study it commissioned that “money earned from home sharing helps nearly 60 percent of Airbnb hosts stay in their homes.”
The study found that Airbnb hosts in the United States have earned more than $3.2 billion over the past seven years. A typical host rents out their home for 66 days each year, earning an extra $7,530 annually. The Airbnb study likened the extra income to the equivalent of a 14% salary raise for a family making $50,000 per year.
“There are definitely two sides of the coin when it comes to the economic impact of Airbnb on a local housing market,” said Rick Sharga, executive vice president at Ten-X.com, the online real estate marketplace. “Anything that takes inventory out of circulation tends to increase home prices, making affordability a challenge for first-time buyers. But owners see their property values appreciate, and they can generate significant cash flow as well.”
It’s also a change that hasn’t been universally welcomed. Since 2010, for example, it has been illegal to rent vacant property for less than 30 days in New York City. This is a law with teeth: In March 2017, a Trump Tower condo owner was fined $1,000 for offering overnight stays a few floors below the President’s residence.
The city of Miami Beach fines owners $20,000 for a first violation. The fines go up from there, and horror stories abound from owners whose homes have been listed on Airbnb illegally.
Many Cities Tax Rather than Fine
But the increasingly-accepted response is not for governments to fight short-term hoteliers; it’s to tax them. A growing number of cities now permit short-term rentals in exchange for suitable tax payments. As a result, home values and rental rates are on the rise.
“Instead of fighting these short-term rentals,” Sharga said, “many cities increasingly embrace them—and the new tax revenues they create. It’s a change few saw coming a decade ago.”
What cities haven’t resolved is how to improve affordability, a major reason we’re seeing fewer and fewer first-time home buyers, especially in high-cost metro cores where short-term rentals are all the rage. Unison Home Ownership Investors, which partners with buyers to co-fund home purchases, reported earlier this year that only 1.4% of the homes in San Francisco are within reach of those who earn the median income in the 25-to-44-year-old age group.
Economic and business conditions change, and there’s no reason to believe that short-term rentals will be less common in the future. That said, there is a price to such success, and for many would-be buyers and renters, that price is affordability.
Peter Miller is a contributing writer for Ten-X and Auction.com as well as a nationally syndicated newspaper columnist. He is the author of the 2016 edition of The Common-Sense Mortgage.