How Short-Term Rentals Increase Homebuilding
Does the proliferation of short-term rental services like Airbnb reduce the supply of housing and increase displacement, or does it boost the overall housing supply? A new study by Bekkerman et al (2021) finds evidence of some marginal benefit: short-term rentals can increase housing supply by attracting more investment for residential development.
Key takeaways:
- The primary finding: “a 1% increase in Airbnb listings is associated with a 0.769% increase in residential permits.”
- According to data from Los Angeles County, overly-strict regulations on short-term rentals can lead to less construction of new Accessory Dwelling Units (ADUs), since they are an ideal way for homeowners to monetize spare living space on their properties.
- Short-term rentals also affect property values. Hard restrictions on Airbnb-style “home sharing” have “reduced the economic value and the demand for residential real estate,” which also supports the body of literature showing how increasing Airbnb rentals have raised nominal housing prices.
Airbnb has been a hot-button issue in housing policy ever since it sprang up as the world’s go-to platform for short-term rentals. Cities around the world have cracked down on short-term rentals, strictly limiting the market and punitively fining violators. The concern makes intuitive sense in some places: wealthy tourists seeking a low-key crash pad for short periods of time could outbid lower-income local households when they are competing in the same rental market.
But rather than permanently displacing locals to make way for lucrative tourist rentals, could this also incentivize more homebuilding to meet the surge of demand? Bekkerman et al (2021) find strong evidence that this does occur. This adds to the growing body of literature that generally shares the same conclusion: “The ability to better utilize spare capacity increases the economic value of and the demand for residential housing.”
In other words, getting regular cash flow from a guest bedroom that would otherwise be empty most of the year makes a homeowner’s property more valuable — but since this is capitalizing rents that would otherwise be “imputed,” it also appears that this increases investment in new residential development. When homeowners see dollar signs appear in their spare rooms, developers also see opportunity in building new rooms.
Given different policy responses to Airbnb across the world, researchers were able to use real-world instrumental variables in several quasi-experiments to study its effects on the housing market. The researchers’ data covers 15 metropolitan regions across 12 years, compiling 2.9 million residential permits, 750,000 unique Airbnb listings, and 4 million home sales.
To make a long story short, Bekkerman et al compared the numbers of listings and new housing permits before and after short-term rental regulations were introduced. This spans nearly all of Airbnb’s existence, from 2008 to 2020, with each of the 15 cities except San Diego introducing some form of strict regulation on short-term rentals.
Overall, the effect is substantial. The evidence shows that the onset of regulations on short-term rentals “reduces Airbnb listings by 21.4% on average in the post-treatment period, and the number of residential permits per month by 10.4% in the post-treatment period.” Since listings represent a stock of units, while permits represent a flow of new construction, this gap in the effect is to be expected, and the effect is greater across longer time spans (“exposure” to the effect of new regulations).
Los Angeles County offers a particularly helpful petri dish, since it consists of many local jurisdictions with their own unique regulations on short-term rentals. By studying the “border discontinuity” of the county’s 88 cities, the authors find that cities with fewer strict regulations on short-term rentals saw more construction permits to build new Accessory Dwelling Units (ADUs), a detached structure in existing residential lots that offer a convenient way for homeowners to rent out extra space without sharing living quarters with tenants. The cities with less short-term rental regulations saw 17% fewer permits for new ADUs, comprising nearly all of the 18% difference in residential permits overall.
All of this evidence suggests that short term rentals offer a degree of elasticity—the responsiveness of suppliers to new demand—in metropolitan housing markets. This tradeoff is an important finding, the authors note, because “knowing this elasticity could help policymakers decide to what extent they should allow short-term rentals so as to achieve a target residential investment.”
These findings are not surprising, since the investment in new construction is inevitably tied to the capitalization rate for existing residential properties. Adding to the evidence, the authors design a regression model to show that “the reduction in residential permits due to home-sharing regulations is associated with an annual loss in property value of $3 billion across the 15 cities we analyze.”
Notably, this tradeoff between elasticity and property values need not be zero-sum for the general public: as other research in urban political economy has shown, it is possible for the public sector to more effectively capture this windfall for private landowners by taxing land rents, rather than essentially imposing fines to deter new investment.
As the authors note, this increase in investment comes from real gains for cities: new sources of income for homeowners, and more tax revenue for cities from tourists. This may be sorely needed after the COVID-19 economic crisis when homeowners are struggling to stay afloat and cities are starved for tourism. Bekkerman et al conclude: “home-sharing is already working for the city’s needs—it is now time for policy makers to recognize the benefits of home-sharing and to lighten its regulations for every city to flourish.”