Short-Term Rentals Make Housing Less Affordable

Thursday, February 2, 2023

The rapid expansion of short-term rental platforms (or STRs) has raised concerns among legislators seeking to regulate companies like Airbnb, a leading online hosting platform at the forefront of conversations surrounding the short-term rental market. Two Purdue University economists, Ralph Siebert and Zaiyan Wei, have independently examined the effects of regulating Airbnb to learn if short-term rentals pose a threat to housing affordability and/or competition.

Wei, an assistant professor of management at Purdue and an affiliate of the Dean V. White Real Estate Finance Program, has written two research papers published in Management Science that examine the effects of Airbnb regulation. With coauthors Wei Chen and Karen Xie, Wei analyzes how limiting the number of properties an Airbnb host can manage impacts long-term rents and home values in “The Battle for Homes: How Does Home Sharing Disrupt Local Residential Markets?” and how the same policy affects competition among hosts in “Regulating Professional Players in Peer-to-Peer Markets: Evidence from Airbnb.”

Legislators in large U.S. cities like New York City and San Francisco have accused Airbnb of allowing a small group of profit-seeking professional hosts to earn millions of dollars at the expense of residents and nonprofessional hosts looking to rent a single property. To ease tensions with local governments, Airbnb implemented a self-imposed restriction that limits the number of properties a host can manage in certain cities.

The restriction, known as the “One Host, One Home” policy, provided Wei with a unique opportunity to examine changes in long-term rental prices, home values, and competition between professional and nonprofessional hosts before and after the implementation of this rule. Wei and his colleagues find that when Airbnb enacted the “One Host, One Home” policy, long-term rents and home values decreased by about 3% in the affected cities.

They also find that this increase in housing affordability can be attributed to an increase in the housing supply in local residential markets after the policy took effect. “Our finding supports that the platform has indeed evolved as a major alternative for property owners to list their assets. The result will be a housing shortage in local markets, which only aggravates home affordability issues that are prevalent in many major U.S. cities,” says Wei.

Wei also finds that the “One Host, One Home” policy levels the playing field between professional hosts who list multiple properties at once and nonprofessional hosts who rent out a single property or room to earn extra income. Before the policy, professional hosts mostly dominated the competition. Once Airbnb hosts could only list one property at a time, nonprofessional hosts were encouraged to participate and fill the gap in supply left by professional hosts forced to delist their additional properties.

Disruptive markets

Ralph Siebert, a professor of economics and the academic director for the economics master’s program in Purdue’s School of Business, also examines the effects of a ban on short-term rentals on long-term rents in a paper called “Airbnb or Not Airbnb? That is the Question: How Airbnb Bans Disrupt Rental Markets,” which is submitted to a top field journal. This research study was conducted with coauthors Michael J. Seiler and Liuming Yang.

Siebert, a Purdue University Research Center in Economics (PURCE) faculty affiliate, and coauthors address the notion that short-term rentals contribute to the housing affordability crisis by incentivizing homeowners to convert long-term rentals to short-term rentals, which leaves a shortage of long-term rental properties and drives up the price. In 2018, the city of Irvine, CA, enacted a complete ban on short-term rentals in residential zones to encourage affordable housing.

Siebert finds that this short-term rental ordinance led to a 2.7% decrease in long-term rental prices on average. The short-term rental ban led to a reduction in $72 million in annual total rental spending, or $1,212 in average savings, on rent for Irvine residents per year.

According to Siebert, the key to the efficacy of policies that restrict short-term rentals is proper enforcement of the law. The city of Irvine was unique in its approach, as it strictly enforced its short-term rental legislation by assigning extra resources and a third-party company to monitor and detect violations. Airbnb listings in Irvine declined by 23.1%, which contrasts with cities like New York where a separate study found that 85% of active Airbnb listings were illegal.

Both Siebert and Wei agree that enforcing short-term rental restrictions is challenging and that the efficacy of these policies depends on adequate enforcement. When asked why the enforcement of short-term rental regulations is so difficult, Siebert cites two main reasons.

“First, from the regulator’s perspective, the enforcement of STR regulations is expensive and time-consuming, and municipalities have limited resources and time to spend on door-knocking properties for STR detection,” he says. “Second, from the owners of Airbnb’s perspective, most Airbnb hosts ignore city rules, and the lucrative nature of the home-rental business resulted in a significant number of properties in cities being advertised and operated as short-term rentals even though there were STR regulations.”

However, Wei’s study cites a policy that was implemented by Airbnb and was not directly imposed by local legislators. Is it any easier for a hosting platform like Airbnb to enforce these regulations as opposed to government intervention? Wei says that “the answer is yes and no.”

Wei points out that there are fewer constraints for tech firms that can effectively impose any policy they want in the pursuit of self-governance. “On the one hand, it may look easier for technology platforms to enforce regulations such as the one examined in this study. On the other hand, the interests of tech firms may not line up with those in the public sector.”

“Most tech platforms, regardless of the size, still have strong incentives to maximize their shareholders’ wealth, which may not align with the goals of the general public.” Wei says. “This presents a major challenge in enforcing regulations over tech firms, especially those with strong network effects and incumbent advantages.”

The research conducted by Siebert and Wei provides legislators with crucial information regarding Airbnb’s effect on local markets. By demonstrating that short-term rentals may harm housing affordability, these researchers provide evidence that highlights the importance of regulation and enforcement for local governments.