The Airbnb effect – Part 2: How do short term vacation rentals impact housing markets?

The evidence is growing that short-term vacation rentals are driving down housing availability and inflating prices in the world’s most in-demand destinations. In many neighbourhoods, local residents are being squeezed out. 

In cities all around the world, the impacts of short-term rentals (STR) on housing markets have been at the forefront of acute critiques and controversies. However, there are important differences between the impacts of each of the three types of STR (see Main types of short-term rental practices mediated by digital platforms below): in theory, strictly speaking, the following discussion relates primarily to Type 1.

STR can impact housing markets if many landlords decide to remove properties from the long-term rental market to convert them into short term rentals. Other things being equal, this would decrease the supply of housing units in the long-term private rental market and put upward pressure on long-term rents.[1] This is more likely to happen in cities or neighbourhoods that already have a tight rental housing market (with high demand and low supply).

The most common methods of measuring STR impact on housing entail estimating the number of units of housing lost (which increases the cost of housing by a quantifiable amount), and/or tracking rents or housing costs over a period of time, compared to the presence of short-term rentals, while controlling for other variables.^[2] While it is not easy to entirely isolate the effect of STR from other possible variables that may influence the supply of long-term rentals and rental prices, it has been argued that once reasonably good estimates for the number of whole-unit rentals available all year round on Airbnb are produced, measuring their impact on the housing market of a city is relatively straightforward.^{[3] [4]} But representatives of large platforms, and at times professional associations of STR operators or hosts, have criticised such methodologies, producing their own ‘counter-studies’^[5] – the latter often criticised, in turn, by researchers or activists.

In high-demand cities, many recent studies have found evidence that the proliferation of STR has contributed to a decline in the housing stock available for long term occupation and to an increase in rental prices – though this is much more pronounced in specific neighbourhoods than when measured at the level of the city as a whole. In Paris, for example, it is estimated that between 15,000 and 25,000 entire housing units are rented on Airbnb throughout the year, diverted from the traditional rental market without the necessary authorisation for “change of usage”.^[1] The monthly or yearly income that can be generated by renting ‘short-term’ rather than ‘long-term’ can be three to four times higher, according to multiple interviewees in the case-study cities. It has been estimated that in New York City, owners of frequently rented entire-home Airbnb listings earn 200% or more above the median long-term rent for the neighbourhood.^[2] In Toronto, it studies show that in ‘up-and-coming’ neighbourhoods in the vicinity of the downtown Waterfront Entertainment district, entrepreneurial operators made between 300-600% of the median market rent in the assessed year from their STR.^[3]

It is clear that STR have created a new form of ‘rent gap’, a concept defined as the disparity between the potential ground rent level and the actual ground rent capitalized under the present land use.^[4] In the case of STR, this gap is ‘driven by sharply rising potential revenue, rather than gradually falling actual revenue’.^[5] The exploitation of this new rent gap in desirable neighbourhoods has happened in a rapid manner through a range of different actors — from individual homeowners and tenants, to small-scale amateur landlords who buy and operate one flat^[6], to multi-property landlords^{[7] [8]}, and more recently real estate investment and wealth and asset management companies.^[9] The STR market has shifted ‘from an individual, unregulated, informal practice to a largescale, strategic management of real estate property’^[10], although this development is still relatively under-researched and difficult to quantify.^[11]

A number of authors thus interpret the exponential growth of STR as part of a broader trend towards the ‘assetisation’ and ‘financialisation’ of housing. ^{[1] [2] [3]} At the level of individual households, this refers to a shift towards individual strategies of investment into property assets as a source of income or equity, in a context of declining redistribution by the welfare state. This often requires increasingly high mortgages, for which STR can become a complementary strategy of income generation. This trend has become intertwined with increasing forms of short- and long-term mobilities and transnational lifestyles. In that context, many European cities have become desirable locations for transnational real estate investments by non-residents buying a second home, a ‘safe haven’ or a profitable asset. ^{[4] [5] [6] [7]}

STR are more likely to impact long-term residential housing markets in countries and cities where tenant protection regulations are weak, and/or if there are easy opportunities for investors to buy empty properties and turn them into STR (e.g. in historic city centres that had suffered decline, abandonment and vacancy). For those reasons, it has been hypothesised that the negative effects of STR could have a greater impact in Southern and Eastern Europe.^[8] In Barcelona, the neighbourhoods with the biggest Airbnb presence – in the historical city centre – were the ones experiencing the greatest population loss^[9], as in Rome.^[10] In 2016, in the district of Ciutat Vella, it was estimated that 17% of all housing units were listed on Airbnb (against 2% for the city as a whole), and in some of its most popular streets, up to 50% of the housing stock.^[11] Correlation is not causation, but interviews with local residents and grassroots activists have revealed multiple cases of tenant evictions, non-renewal of rental contracts or heavy pressures on sitting tenants to make way for STR – processes facilitated by weak tenant protection laws.

The impacts of STR on housing markets have thus been discussed by scholars in relation to broader processes and dynamics of ‘gentrification’ and ‘touristification’.^{[28] [29] [30] [31] [32] [33] [34]}

In popular tourist cities, processes of displacement of lower income groups and traditional retail from historic centres started before the emergence of Airbnb in 2008 (Venice being one of the most extreme cases). But the new rent gap created by STR has sharply intensified those processes.

Broader changes in the national regulatory and policy environment can also fuel the growth of STR, as illustrated by the case of Lisbon. From 2012 onwards, a combination of national reforms in the fields of taxation, visa, citizenship and rental legislation has had a dramatic impact on the pace of conversion of housing units into STR. ^{[35] [36] [37]} These reforms have strongly incentivised foreign investments into Portuguese real estate and made it easier for long-term tenants to be displaced in favour of STR. Between 2015 and 2019 the number of STR licences increased from 3,174 to 20,014.^[38] In the UK, recent reductions in tax breaks for ‘buy-to-lets’ might make STR more attractive in terms of financial returns. Any discussion about managing or controlling the growth of STR thus needs to consider these broader policy fields — which are often beyond the remit of city governments.

Altogether, the existing body of research on the impacts of STR on neighbourhoods and cities faced with strong demographic pressures, high visitor flows and a tight housing market show that the increase in STR has contributed to a decrease in the supply of long-term rentals, induced an increase in rental prices, and fuelled the displacement of some residents: either owners/sellers who move elsewhere voluntarily, or tenants who aredisplaced against their will. However, those impacts are not easy to quantify and may not be quantitatively significant at the level of the city or metropolitan area as a whole when compared to other factors influencing the housing market. Nevertheless, those impacts are often highly concentrated, and thus much more intense, in particular areas affected by a sharp growth in the number of STR relative to their total housing stock. In those areas, the existing social and economic fabric has come under threat as a result. A study prepared for the European Commission – covering Berlin, Barcelona, Amsterdam and Paris – concluded that the STR sector has ‘not necessarily caused housing shortages and affordability issues but its growth may have aggravated these conditions, in particular in centrally located districts’.^[39]