Short-Term Rentals and the Housing Market: Evidence from Airbnb in Los Angeles

Yves here. This is an important analysis. Even though it confirms what would seem intuitively obvious, that Airbnb helps investor/owners and hurts renters, Airbnb boosters have tried arguing that restrictions on short-term rentals would not produce the desired effect. The data from Los Angeles shows the reverse, particularly in tourist areas.

By Hans Koster, Associate Professor; Jos van Ommeren, Professor of Urban Economics; and
Nicolas Volhausen, Research Analyst, McKinsey; PhD student; all of Vrije Universiteit Amsterdam. Originally published at VoxEU

Short-term rental platforms such as Airbnb have grown spectacularly in recent years, and local governments around the globe have responded differently in regulating such rentals. This column analyses the effects of a policy change in several cities of Los Angeles County that restricted short-term rentals of entire homes and apartments. Airbnb has led to an increase in house prices that is particularly pronounced in popular tourist areas, and homeowners in these areas lose out from the regulation. Renters, on the other hand, benefit from the regulation.

Short-term rental platforms such as Airbnb have grown spectacularly in recent years. Since its launch in 2007, Airbnb has grown into a multibillion-dollar business, now offering more than 4.5 million listings in over 190 countries worldwide. Airbnb allows individuals to list their spare room or entire apartment for a self-established price to potential guests from all over the world. Particularly in heated housing markets, the new business model developed into an attractive opportunity for generating alternative income streams. However, the surge in popularity of these platforms has also led to substantial opposition because of decreasing housing affordability (Samaan 2015, Sheppard and Udell 2016), illegal ‘hotelisation’ and unfair competition (CBRE 2017), and other negative effects such as noise disturbance or overcrowding within and around buildings (Newling 2016).

Local governments around the globe have responded differently towards regulating short-term rentals. Most cities have not significantly regulated these platforms, but a limited number have put severe restrictions in place. Berlin, for instance, requires short-term-rental hosts to occupy the property for at least 50% of the time (O’Sullivan 2016). San Francisco imposes a cap of a maximum 90 rental days per year and a 14% hotel tax (i.e. Transient Occupancy Tax) (Fishman 2015), while Amsterdam will impose a 30-rental-days cap from 2019 onwards.

The effect of such regulations appears straightforward: basic economic theory tells us that in the absence of negative externalities, such regulation induces a reduction in housing prices (and rents) by restricting the most efficient use of housing. This reduction will be particularly pronounced in locations that are attractive to tourists. However, the presence of substantial negative externalities may lead to the exact opposite: regulation may induce prices (and rents) to increase because the reduction in negative external costs due to regulation will increase residential demand. Hence, the net effects of short-term rentals on the housing market are still unknown.

The Case of Los Angeles

There are numerous reports indicating a strong positive relationship between property values and the intensity of short-term rentals. However, calling out Airbnb as the culprit of rising housing prices and rents is problematic, since many cities have become increasingly popular among both locals and tourists in recent years, leading to higher housing prices and a higher number of Airbnb listings. In our paper (Koster et al. 2018), we overcome this challenge by relying on a quasi-experimental research design for Los Angeles County.

Similar to other cities, Airbnb rapidly grew in a decade from just a handful of listings to close to 40,000 properties in Los Angeles County (Inside Airbnb 2018). While many municipalities still struggle with putting up regulatory measures to curb the surge of short-term rentals, 18 out of 88 incorporated cities in Los Angeles County have severely restricted short-term rentals of entire homes and apartments by adopting home sharing ordinances (HSOs). These HSOs essentially banned informal short-term rentals: hosts renting out entire properties became subject to the same formal regulations as hotels and bed and breakfasts. Home-sharing through Airbnb (as well as long-term renting) is not prohibited but restricted.

Figure 1 Airbnb in Los Angeles County

There are several reasons why we focus on Los Angeles County. First, it is the most populous county in the US and its main locality, the City of Los Angeles, has not yet formally regulated short-term rentals or enforced a comprehensive regulation (see Figure 1). This enables us to focus on changes in the number of Airbnb listings as well as housing prices close to the HSO-regulated places. We use micro-data on Airbnb listings and housing prices between 2014 and 2018.

Our data allow us to distinguish between effects on different types of listings (home-sharing, entire properties), as well as on the prices of different types of housing (apartments, single-family homes). We also extend the results to include effects on rents.

Our empirical approach relies on a panel regression discontinuity design, where we compare listings that were affected by HSOs (treatment group) with nearby listings that remained unaffected by the legislation (comparison group). The borders of the HSO-affected cities serve as a geographic cut-off point, which assigns listings into either the treatment or comparison group. This quasi-experimental research design enables us to measure the causal effect of the HSO on Airbnb listings and housing prices.

Measuring the Causal Effect of Airbnb on the Housing Market

First, we estimate the effect of HSOs on a property’s probability of being listed on Airbnb. In Figure 2A, we plot this probability. We observe a sizable drop in listings in HSO-affected areas. Given an average probability of being listed of about 30%, the ordinance strongly reduces the number of Airbnb listings by around 30%. We plot the effect over time in Figure 3A and show that the reduction in listings is about 50–60% in the long run. Hence, in line with anecdotal evidence, this suggests that HSOs are very effective in reducing short-term rentals.

Figure 2 Airbnb listings and housing prices: Variation near the HSO borders

Note: Negative distances indicate areas outside HSO areas, and areas inside HSO areas before treatment. The dots are conditional averages at every 200-metre interval. The dotted lines denote 95% confidence intervals.

Figure 3 The effect of the HSO on listings and housing prices over time

Note: The dotted lines denote 95% confidence intervals.

One expects a negative effect of the HSO on housing prices (except when negative externalities are substantial). We now compare changes in housing prices near the HSO borders. Figure 2B suggests that housing prices have been reduced by about 3%. The effect turns out to be highly significant statistically and although we examine effects at a very local level (within one kilometre of the border), we show with more elaborate statistical techniques that the estimated effect is very robust to the choice of the geographic focus. This effect becomes more pronounced over time (see Figure 3B). We also analyse the impact of HSOs on rents and show that the effects are essentially the same.

Using these estimates, we estimate the overall impact of Airbnb on property values and show that the effect can be large. For example, in areas within five kilometres of Los Angeles’s central business district, the price increase is 14%. Within 2.5 kilometres of beaches, the price increase due to Airbnb is almost 10%. Hence, in areas that are attractive to tourists, prices are substantially higher, while in areas without much tourist demand (e.g. Pasadena), effects are small.

Policy Implications

What can we say about the distributional and welfare effects of Airbnb regulation? Using a back-of-the-envelope calculation, we show that regulating Airbnb has stark distributional implications. A regulation implies losses for homeowners, which are substantial for individuals who live in areas popular with tourists. The opposite holds for households who typically rent, who can only gain from such a regulation. Given the average housing price in HSO cities and given our assumptions, this therefore implies an annual welfare loss due to HSOs of about $680 per property. The intuition for such a substantial loss is that the investors’ willingness to pay is much higher than the willingness of the incumbent households being priced out of the market.

There are clear distributional implications of the HSO. We show that rents will decrease due to the HSO, so the average renter will gain. Because of the HSOs, homeowners lose, while renters tend to gain. This offers a plausible explanation as to why cities around the world that have heavily restricted short-term rentals typically have a high share of renters.

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  1. Dave

    I recently did a hiking trip with my adult daughter (25y.o.) which included Zion NP, Bryce Canyon NP and Sedona AZ. The trip was great (minus Airbnb), the memories priceless and I will never stay in an Airbnb again. The Airbnb nearly ruined the trip, as the places we booked were not quite reflective of the adverts upon which we based our decisions to stay. We meticulously planned this trip, browsing Airbnb adverts and drive times as well as reviews. The reality vs the internet reality are quite stark. Never again…… I will stick to national hotel chains with regulatory oversight and standards.

    1. PlutoniumKun

      I think AirBnB may well be suffering the sort of crapification problem so many accommodation service websites in that they are getting increasingly gamed by users (similar to how so many hotel booking or review sites seem to degrade over time. I’ve read a few statements from AirBnB about regulations and I think they are seeing some advantages in cleaning up their act to maintain a better reputation in order to stave off competition. Although greed may well win out in the end.

      Anecdotally, I think a lot of people are moving away from AirBnB to home swap websites – I’ve heard a lot of people recently say they’ve had really good experiences with them. Of course, you can only use them if you have a home to swap.

    2. Jason Boxman

      It’s certainly a mixed bag. When I was traveling I stayed in probably 10 AirBnbs mostly in 2016. I was willing to spend on the lower end, so I virtually always had other travelers in the same home/apartment with me.

      I’d say nothing beats staying in a hotel if you’re willing to spend the money.

      My best experience was as the only traveler at a place in Raleigh, NC. The gentleman kept a nice place, it was pretty large, I had the entire upstairs, and he mostly worked and slept.

      The rest of my experiences were mostly just strange or horrific. A couple places made copies of their keys that didn’t quite work, so it was always a challenge to get into the place I was paying for.

      My worst experiences were definitely in Cambridge, MA. The first place, the night I arrived after I went to bed, the couple the next door down in the same apartment had a loud fight, then “made up” even louder. I got a refund for the rest of the stay and rented a hotel. The next worst place, the key didn’t work again and the bed was a loft where if I moved, I’d scratch my body against the ceiling. I found an apartment to rent and moved out before my 2 week stay ended.

      Overall, I may be tempted to do AirBnb again because I saved so much money traveling. (I stayed 6 nights in every city, for never more than $500, including a place near Boston, in Arlington VA, and Jersey City near NYC, and 3 places near Charlestown SC.) But you are definitely roughing it, unless you pay as much as a hotel or get lucky. And why not just get a hotel room then?

    3. RUKidding

      I use AirBnB when I visit San Diego, where I used to live. The 2 places I use (and now know the owners) turned out great; their condos are nice; I have my own room & bathroom, plus use of the kitchen.

      It’s much cheaper than a hotel room, plus having kitchen privileges seals the deal for me. I do go out to eat but also want to eat at home. Both places are very close to a beach and state park that I like to hike in, plus they’re convenient for my other activities.

      In general I’ve had positive experiences with AirBnB, but I do have friends who’ve had horror stories. It is a punt as to what you’re going to get.

  2. PlutoniumKun

    This is important research – I’ve heard from people I know dealing with the regulatory side of this issue that there is quite a lot of scepticism about whether AirBNB really is having more than a marginal impact on overall property values. This seems to show that the impact is very significant, although I haven’t seen any equivalent European research – this has tended to focus on demographic impacts.

    It does raise the interesting question though as to the impact on the scale of an individual apartment building. Many (including the building I live) are seeking to ban or restrict short term lets for amenity and security reasons. The assumption among home owners in these blocks is that it will raise their property values by improving the quality of the building – it would be interesting to know which variable is stronger in terms of individual unit value/rent.

    1. lyman alpha blob

      My town recently banned Airbnb in any house not also occupied by the owner for precisely the reasons cited in the article – skyrocketing housing costs. Having several hundred units of the long term rentals taken out of the market in my area creates demand to build more long term housing to compensate, but while everything is booming, prices don’t go down even when inventory is increased, at least for a time.

      Until of course it does go down. All the people in a rush to buy their own property to rent out short term on a platform are performing a very valuable service for the platform owners – they are doing price discovery for these companies and determining exactly how many units each market can bear and at what rental cost. Right now, these often illegal de facto hotels can command a pretty good price, at least until any given area has too many of them. Once an area is oversaturated, owners will have to decrease prices to get the rooms filled and some won’t be able to, so they’ll either sell or go back to offering to rent long term. Except a whole bunch of other properties have now been built too which will put downward pressure on long term rents. Airbnb doesn’t give a damn – since they don’t own the underlying properties, they bear no risk whatsoever if housing prices tank, and they still get to rake in fees for every single short term renter in the area anyway.

      To me, banning these properties from being rented short term is doing the owners a favor, whether they realize it or not. As we are wont to say around here, if your business depends on a platform, you don’t have a business.

  3. JR

    As a homeowner who does not rent out rooms, I guess I find myself liking HSOs (since I’m not looking to sell my house at this point), as the reduced housing prices should result in lower real property taxes. Stated as a question, absent HSOs, am I subsidizing Airbnb thru higher property taxes?

    1. Anon

      Yes, you are. But it’s indirect.

      Many AirBnB solicitors in my tourist town are not paying a TOTax (10%) and that money woud help run local government. Also, AirBnB solicitors ARE raising rents and making the homeless issue worse. As for home prices, unless you are Blackstone the price regular folks are willing to pay is a function of interest rates. (The more the banks will lend the more people creating a bidding war.)

  4. ACF

    While it is obvious, it is worth considering that “HSO”s to use the article’s term, vary widely. Where I live, it’s illegal to rent for less than two weeks. But there’s no other provision; no rental permit, e.g., no standards like B&Bs, no occupancy by owner, etc. In addition, we have a very small code enforcement office. As a result, our local HSO is very hard to enforce. (Short of intensive monitoring, or subpoenaing records from platforms like Air BNB, it’s hard to prove the length of the lease (no one need stay for a whole lease term) and that the person staying short term isn’t a relative or a friend staying for free). So we still have lots of short term rentals. Personally, if there was a way to legislate short term renting by second homeowners or primary homeowners who otherwise use their house for a substantial period of time (like the German regulation in the articles) coupled with a rental permit that imposed a code of conduct (noise, trash, etc.) and safety standards for the unit, I could support it–these are not properties otherwise available to the year round rental market. But “rental farming” as we call it–buying multiple investment properties for short term renting instead of long term renting–has exacerbated our housing crisis and I wish we had better HSO and enforcement to end it.

    1. Off The Street

      Some friends from Los Angeles have related their neighborhood woes due to an AirBnB house. They have found the following, literally an example of NIMBY:

      Loud parties any day and night of the week
      Cooking smells from barbecuing attempts gone wrong
      Lack of engagement in any meaningful community sense among those tenants
      Parking and litter
      Resulting into frequent calls to police

      They have a neighborhood social media page. There is one slight benefit (stretching here a bit) of getting people to connect more even if for venting or developing plans of action about the most recent egregious behavior. They see a breakdown in civility and a selfishness that was previously not on display. The owner of the AirBnB property does not acknowledge any issues publicly.

      1. lyman alpha blob

        To counteract Airbnb owners who feel there is no problem with setting up illegal hotels in residential neighborhoods to rent out by the day, pissed off neighbors be damned, why not purchase a property next to their Airbnbs to rent out by the hour with all that that implies? ;)

        I bet you’d start getting a LOT of complaints from these clowns complaining their guests were being inconvenienced. What’s good for the goose….

    2. Light a Candle

      In British Columbia, some local governments like Vancouver restrict short-term rentals to primary residences only i.e. the owner must use the dwelling as their home. This is to prevent commercial hosts with multiple units. It is the commercial hosts which have the biggest negative impact on the availability of affordable long-term rental stock in low-vacancy housing markets.

      And fines are $1,000 a day for even advertising.

      SF, Washington DC and Boston have recently started regulating STRs (short-term rentals) too after ignoring the significant negative impact on their long-term rental stock for years. Ditto Seattle but Seattle’s approach seems likely to fail.

  5. Jack

    I am a long time Band B user, use which spans most of the US and many overseas locations. If I were asked IMO which one factor could be identified as the major problem with this industry, it would be that of the non-owner occupied rentals. Every problem I have had with an Air Band B has been in a unit that was operated as an investment. Many investors have jumped on the Air B and B bandwagon, buying properties just to rent short term. I make it a practice now to not rent from any host that owns other properties (with a few exceptions). They have to live there as well. You can usually figure this out by looking at the reviews of each listing. I think Air B and B and other services like it are a good concept. But line anything it seems, if not properly regulated the greed sharks move in and ruin it for everyone. Air B and B itself could minimize most of the problems, but they love the money too much. Eventually it will come back to bite them on their ***. But most big business is that way these days. Maximize profit with no thought of the harm it incurs and don’t worry about the consequences down the road. The sooner the US wakes up to the fact that big business needs to have maximum regulation imposed, the better.

    1. RUKidding

      The only places I’ve stayed have been owner-occupied, and these have all been good experiences so far.

      I, too, had some concerns about staying in places where the owner is not living there, so you’re comments are helpful.

    2. Rajesh K

      Skin in the game. Yeah, when traveling within the US, I’ve always made sure to stay with an owner as well. And when I mean owner, it’s literally the owner instead of someone renting a place then listing an extra room in AirBnb.

  6. Wukchumni

    At our last town hall meeting, I bought up in our Fire Safe Council talk that “we have a few vacation rentals in town” and nobody ever went wrong wildly underestimating something, and the assembled throng of 80 towns people all started laughing and guffawing @ once. Yes Virginia, they are that common here.

    They’re the worst thing of all, a profitable menace with no real standards or expectation of privacy. Nothing like electric scooters, or Uber, et al.

  7. anon in so cal

    “A regulation implies losses for homeowners, which are substantial for individuals who live in areas popular with tourists”

    Surely this claim only applies to homeowners hoping to sell their home or hoping to use its equity to get a HELOC?

    We live in the Hollywood Hills. There are several Airbnb and HomeAway rentals in our neighborhood and they *harm* the neighborhood. They entail more traffic, more parking problems, and more potential noise and grief for nearby neighbors. Particularly upsetting is when absentee homeowners rent out the entire house. While renting the entire house can mean less demand for parking spaces, it all too often means noise from unruly, un-vetted renters.

    Airbnbs are related to another huge issue: party houses. For years, homeowners would rent out the entire house, which would be used for all-night parties, with amplified club music, traffic nightmares, etc. Fortunately, the City of Los Angeles implemented a Party House Ordinance:

    1. Wukchumni

      About 5 weeks ago the trashman tells me his load caught on fire, and there was a mad scramble on the radio to get the fire depts there in a jiffy, and he dumped his load on the road, and it was put out, luckily.

      This was during red flag-no fire days, and more than likely somebody* with a vacation rental had a fire they shouldn’t have, and thought the ashes were cold, but apparently not enough.

      * I have no proof other than that’s something a touron would do

      1. Angie Neer

        Reminds me of an event here a few years ago: guy cleans out his fireplace, putting hot ashes in a metal garbage can and placing the garbage can in the driveway, away from house and trees. Guy’s mistake was that he didn’t communicate that to anybody. Wife comes home, thinks “what’s this garbage can doing out here?” and drags it into the garage. A few hours and a spectacular fire later, the garage is history. Fortunately only the garage, because this was during winter in the Pacific Northwet, where fires don’t propagate quite the same as in Wukchumni territory.

      2. anon in so cal

        Yes, short-term renters often have no awareness of neighborhood risk factors, such as fire danger caused by ashes or smoking outdoors on red flag days.

        Somewhat relatedly, the additional traffic associated with short-term renters sometimes mean emergency vehicles would not be able to traverse some narrow hillside streets.

  8. Cal2

    I think the real estate industry loves AirBnB because of the churn that it creates, people not only think they can get rich flipping houses, but can buy them and make them into profitable hotels.

    So AirBnB’s permitted as just another way to kick the can down the road and maintain real estate values–in places that matter, the Blue voting coasts.

  9. Chris

    My biggest problem with AirBnB is that the owners, whether they occupy the space all, part time, or none of the time, have zero safety requirements for the rental. No need for fire extinguishers. No requirement for up to date code reviews. No need for smoke alarms or CO alarms. No need to clearly explain where the nearest hospital is. No need to show you where the breaker panel is. No need to make sure the house is electrically safe. No need to make sure there are regresses.

    But…there are plenty of incentives to cut corners on all those items.

    I understand the attraction to AirBNB. I really do. But given all the issues and the safety concerns, they should not be legal without some kind of regular inspection and additional code requirements for life safety.

  10. Anon

    I’m a Millennial “superhost” on Airbnb. It has been a lifesaver for me as a middle-income first time homeowner (of a small condo) in a high cost city that brings in lots of tourism. I understand the problems that Airbnb bring, but I also see it to be nearly impossible for the middle class (and even upper-middle class) to survive in cities like Los Angeles, San Francisco, Honolulu, New York City, Boston, Seattle, etc. without an alternative income stream. I work with attorneys who barely get by after the cost of rent, food, bills, and student loan payments. A generation or two ago well educated professionals like us would have been able to afford a nice home for our families.

    Airbnb gives me much more flexibility and is easier than working a second job making less than what I do no just renting out a room in my apartment. I feel very fortunate to even own a place in my city. Most people my age still rent with little hopes of ever owning a home. I was able to save a lot of money in a previous job in a lower cost city which is the only reason why I was able to afford to buy. Airbnb is helpful – I have been able to use my earnings to go on a vacation, pay down credit card debt, and renovate my home. But like Uber and Lyft, Airbnb is symptomatic of a bigger problem, which is that the middle class is becoming more desperate in cities where it is difficult to survive without participating in the sharing economy.

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