Katya Schwenk

The best proof that banning Airbnb would lower the price of renting

Katya Schwenk

The best proof that banning Airbnb would lower the price of renting

Maybe in the USA they have found the solution: New York has banned tourist rentals, and a study shows that this same measure in Irvine, California, served to lower housing prices.

Last September 5, Airbnb was banned in New York. After a series of desperate attempts by the company to prevent such limitations on vacation rentals, the regulation went through. In a matter of weeks, thousands of properties advertised on the city's Airbnb platform (until then one of its largest markets) disappeared. Of the approximately 3,000 Airbnb listings remaining in New York, down from 22,000 in August, the vast majority are for stays of 30 days or more, the minimum number of nights required by city regulations.

This legal offensive against vacation rentals has been a turning point. Despite legal appeals and protests from property owners, the city seems to have put an end to vacation rentals. The idea behind the measure is quite simple:

New York, where the median price of a studio is $3,016 a month, is the epicenter of the affordable housing crisis the US is suffering. But if Airbnb's are repurposed into long-term rentals, there will be more supply and competition. In theory, this should make housing in the city more affordable.

Airbnb has long denied that the housing crisis is its fault, but the latest proof that New York has made the right decision comes from the opposite side of the country. Irvine, California, a quaint town of 300,000 in Orange County, banned short-term rentals in 2018, in the face of complaints from residents that residential neighborhoods were filling up with tourists. And according to a new study published this summer in Real Estate Economics, the move had a noticeable impact. After Irvine's ban went into effect, the price of long-term rentals in the city fell by an average of 3%, according to the study, a decrease of $114 per month or about 106 euros.

While Irvine is a unique case study, it also validates years of research that has found that Airbnb and its many imitators drive up rents and housing prices. That may be good for landlords, but if you care about affordable housing, then it's worth learning a lesson from Irvine: banning vacation rentals can actually drive rents down.

The Case for Irvine

When the city took on vacation rentals in 2018, Airbnb seemed unstoppable. A decade after its founding, the company had turned the hotel industry upside down and was profitable for the first time in its history. Its tentacles had spread to cities around the world, turning entire neighborhoods (in the worst cases) into tourist rentals. Private rentals had gone from being an idealistic project to a reality.

Locking a house

Irvine's 2018 vacation rental regulation (which banned rentals of 30 days or less in all residential areas) was unprecedented. A slew of cities had passed ordinances banning short-term rentals, only to see Airbnb ads keep popping up. But as Michael Seiler, a finance professor at the College of William & Mary and one of the researchers who worked on the new study, explained to me, Irvine has managed to get rid of Airbnb for one reason: enforcement.

"What's so different in Irvine is that they didn't just put in the ban, they've enforced it," Seiler points out. 

In New York state, for example, the law has long prohibited renting residential apartments for less than 30 days, except in very limited circumstances. Yet Airbnb hosts have flouted the rule for a decade. Why? It was very difficult to enforce. 

The thousands of Airbnb listings that disappeared overnight in September had always been illegal, but they managed to survive because they were "legitimized by this multibillion-dollar Internet platform," explains Murray Cox, founder of Inside Airbnb, a project that examines Airbnb's impact on cities. New York had just finally found a way to enforce the law: it established a registration process for short-term rentals and banned Airbnb and other platforms from advertising rentals that had not previously registered with the city.

In Irvine, it took the city about a year to figure out how to eradicate tourist rentals, so entrenched in its sunny planned neighborhoods. The city had to hire a company specializing in real estate technology to identify and locate illegal rentals in order to enforce the ban. Still, some landlords came up with ingenious ways to get around the city's regulations, such as offering 30-day rental contracts that, if you looked at the fine print, could be canceled at any time, allowing a weekend stay.

"It was detective work," says Ken Fairbanks, a board member of an Irvine homeowners association who used to frequently investigate complaints about Airbnbs in his own neighborhood. But now, Fairbanks says there are none left in the neighborhood. That's consistent with data on short-term rentals in Irvine, which showed that by January 2021, the number of listings had been cut in half.

When the researchers studied the effect of the sudden disappearance of short-term rentals in Irvine, they detected a surprising result: within 2 years of the ban, the price of regular rentals dropped significantly. They calculated that the city's approximately 60,000 rental units experienced an average decline of 3%, which "equates to an $80.7 million reduction in total annual rental spending." 

The strength of the evidence led the researchers to conclude that the results "provide local governments with empirical evidence that regulatory policies could be useful in reducing rents in cities."

People were already living there before

While the Irvine study showed that Airbnb bans can drive down rents, there was already plenty of research showing the flip side of the coin: when short-term rentals come to town, prices go up. A 2020 study of short-term rentals in Berlin concluded that apartments posted on Airbnb increased prices in nearby areas. And a 2017 study in Boston came to a similar conclusion. Others have documented these impacts on rentals across the United States, including 2021 research that estimated that Airbnb listings accounted for one-fifth of rental growth in zip codes with a median proportion of people owning and occupying their home. 

If we take into account the law of supply and demand, the findings make sense. When the supply of a good decreases but demand stays the same, the price of that good will go up. That's what Airbnb does with the supply of housing. According to the Berlin and Boston studies, when houses or apartments are taken off the market long-term to be used as tourist rentals, the supply of housing decreases. But residents still need a place to live, so they are forced to pay more. Irvine researchers calculated that rents dropped after the local ban because, when landlords put their Airbnbs back on the market as long-term rentals, there was more housing supply. Suddenly, landlords had to compete for tenants, making it harder for them to raise rents. The Irvine study found little evidence for alternative theories, such as the idea that the Airbnb ban hurt the local economy by reducing tourism, thus displacing renters and decreasing demand for rentals.

It's "common sense," according to Cox. "It's not an abstract commodity. There used to be people living there," she said of short-term rentals. 

When I was a local reporter in Burlington, Vermont (where I covered the city's desperate housing crisis), I lived in an apartment in a rundown old downtown building, which I rented for $1,300 a month (about 1,200 euros). Shortly after I moved in, in June 2021, the unit was renovated, filled with the ugliest Ikea furniture I'd ever seen, and turned into an Airbnb, where it goes for almost $300 a night if you include the cheating "cleaning fee." If you do the math, that apartment is much more profitable for the owner as a short-term rental, even factoring in the cost of aesthetic improvements. The housing is likely to generate thousands of dollars more per month than what I was paying in rent. Given these incentives, it would take a strict prohibition to turn the apartment back into a long-term rental. Otherwise, why would the owner take such a loss?

To address this phenomenon, some places, such as Summit County in Colorado, have begun paying landlords to convert vacation rentals to long-term housing. In the short term, this type of initiative could help reclaim housing. But it is expensive (and probably unsustainable) for cities to indefinitely pay the difference between long-term and short-term renters. In Summit County, the program spent $1.65 million over 2 years on just 87 homes.

A desperate need for housing

The arguments against New York's ban were as follows: some said Airbnbs were not a major factor in the city's housing crisis. Others argued that the homes would sit empty if they were not used for Airbnbs, or that they would only benefit higher-income renters, not renters in need of affordable housing. In its lawsuit against the city, Airbnb argued that the ban would "exacerbate the very problem of housing availability and affordability" by increasing hotel development.

When asked to comment on Airbnb's impact on housing affordability, a company representative had this to say: 

"There are a number of complex factors driving the current housing affordability crisis (from growing income inequality, to decades of exclusionary zoning, and even changing location preferences post-pandemic, including the rise of telecommuting), but many experts agree that the primary driver of the affordability crisis is chronic underproduction of housing, not short-term rentals. Unfortunately, tourist rentals, which in most cities represent a tiny part of the local housing stock, have become a convenient but misguided scapegoat for a housing crisis that began long before the founding of Airbnb."

The spokesperson added that in New York City, "there is no evidence that the new rules will help alleviate the city's housing affordability problems," pointing to a statement by a former Deputy Mayor for Housing, Alicia Glen, that she had seen no evidence that short-term rentals had a significant impact on the housing crisis.

Based on research, it appears that Airbnb bans have a more significant impact on the availability of higher quality, less affordable housing; housing, in other words, that is more likely to become Airbnb. But that doesn't mean the bans won't also benefit low-income renters. Increasing the supply of housing for higher-income renters can help reduce pressure on the rental costs of low-income renters. It's a "helpful and healthy move for the overall housing market," according to Sarah Saadian, senior vice president of policy and field organizing at the National Low Income Housing Coalition. 

And that's especially true, she continues, "if I look at a place like New York City, where there is a tremendous need for housing at all income levels." 

Also note the significant disparities that exist in the United States between homeowners and renters. For example, homeowners, especially those who own more than one home, are overwhelmingly white. And renters in the U.S. are more likely to be people of color, have lower incomes, and be disadvantaged for other reasons. Vacation rentals only exacerbate these inequalities by driving up the median rental price and putting profits in the hands of landlords. On the other hand, increasing the supply of housing and reducing rents can help vulnerable tenants.

Of course, banning Airbnb is not a panacea for the devastating lack of affordable housing. Depending on the housing market in question, the impact of this measure could be barely marginal on prices. But that doesn't mean it's not worth a try. Housing is a commodity, and we should do everything we can to create more of it.

"If we wait until we have a single solution that solves all the problems, we won't make progress," Saadian argued.

Of course, the housing crisis is not confined to the United States; in Spain it has also become a serious problem, especially in the big cities. Renting an apartment is becoming more and more complicated, not only because of prices but also because of the requirements demanded by landlords. And the same goes for buying: if you are young, and you want to buy your own home, you may be in one of the worst times to do so.

Will the Airbnb ban be a possible solution?

Author: Katya Schwenk

The authors are responsible for the choice and presentation of the facts contained in this document and for the opinions expressed therein, which are not necessarily those of Tourism and Society Think Tank and do not commit the Organization, and should not be attributed to TSTT or its members.

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