Navigating the Short-Term Rental Wave: The Impact and Regulation of Airbnb on the Housing Market

Airbnb’s business is flourishing. By April 2023, the global market capitalization of Airbnb was valued at $73.34 billion. This figure not only reflects the success of short-term rentals but also serves as a clear testimonial of the substantial impact it has had on the housing market and local economies.

The company’s impact has prompted cities to consider new rules for managing the rise of short-term rentals. Understanding this short-term rental wave is important for homeowners, renters, and those making policies in the housing market.

Let’s take a closer peek at the opportunities and challenges that Airbnb presents in the housing market. We’ll also tackle regulatory challenges and how states are responding to them to maintain stability in the housing market. 

The Rise of Airbnb and the Short-Term Rental Market

Short-term rentals have been around for a long time, but they gained a lot of popularity with the watershed moment that was the start of Airbnb in 2008. Previously, people often rented vacation homes, a practice that’s been common since the 1950s, as an alternative to staying in hotels.

Airbnb, launched in 2008, stood out by letting guests book just one room in a host’s house and using a more modern, easy-to-use online booking system. The company grew quickly, going from just 10,000 users and 2,500 listings in 2009 to 6.6 million active Airbnb listings globally by the end of 2022.

However, this rapid expansion has not been without challenges. In response to the growing number of listings and the platform’s impact on local housing markets, many cities have introduced regulations to manage the growth of short-term rentals. 

These regulations range from requiring hosts to register as short-term rental operators to restricting the types of properties that can be listed. However, since renting is still cheaper than owning a home, homeowners are still opting to rent much more often than to sell.

This boils down to a simple fact of life — selling incurs capital gains taxes, so even if the property is objectively valuable in a long-term sense, it’s still better for homeowners to have both the bump to their net worth + additional income. And no, rent is NEVER passive income, despite what some may tell you.

Another recent development is companies like Sonder and Stay Alfred which offer properties managed by experts,  combining the charm of vacation rentals with the professionalism of hotels.

Impact on Local Real Estate Markets

The impact of Airbnb on local real estate markets is multifaceted, with both positive and negative effects. Let’s explore both sides of the coin.

Opportunities

Short-term rentals are in many cases a better and faster way to earn an additional income than long-term rentals.

With long-term rentals, your property is “locked up” for a longer period, and you have to consider tenants’ rights, draft a lease agreement, do a credit check, verify that potential tenants are employed, and (hopefully) maintain a good, professional long-term relationship with tenants.

In comparison, if you opt to use a platform like Airbnb or an alternate method for short-term renting, if you have a property that meets the required standards, renters only have to sign documents online, and you have to do a bit of cleaning and maintenance. 

On a more macro-scale, the influx of visitors using short-term rentals can lead to increased spending in local businesses, such as restaurants and shops, thereby boosting the local economy.

Lastly, areas with a high concentration of short-term rentals can experience an increase in property values, benefiting homeowners who choose to sell.

Challenges

A recent study found that the increase in properties being used for short-term rentals through platforms like Airbnb can reduce the availability of long-term rental housing. This is particularly impactful in cities with existing housing shortages. 

The rise of Airbnb listings in a particular area can drive up property values and rents. According to research, a 1% increase in Airbnb listings translates to a 0.018% increase in residential rents and a 0.026% increase in home prices. Over time, this can make housing less affordable for local residents​​.

For regular investors who do not have a spare room or property, the barrier to entry can be quite high, seeing as how the space is quite competitive. 

Investors generally shy away from investing too much into new properties, likening it to the practice of options trading — though potentially lucrative, it takes 3+ months to become profitable, and both markets are quite volatile — not to mention the fact that you’re competing against large companies like hedge funds or VC firms, which we’ll get to in a moment.

On top of that, some cities have imposed restrictions like the “one host, one home” policy, which aims to prevent property owners from listing multiple properties on Airbnb and thus taking them off the long-term rental market​​.

Regulatory Challenges and Responses

Airbnb’s rapid growth has presented various regulatory challenges and prompted various responses from local and national governments worldwide. These challenges revolve primarily around ensuring fair competition with traditional, licensed accommodation providers, addressing housing affordability concerns, and managing short-term rentals’ impact on local communities.

One significant regulatory issue involves the disparity in compliance requirements between Airbnb hosts and licensed accommodation providers. 

Different cities globally have adopted varied approaches to regulating Airbnb and similar platforms. For instance, Amsterdam initially had unregulated peer-to-peer accommodation but later introduced a framework that limited unhosted rentals to a maximum of 30 days per year. 

In New York City, stricter regulations have been implemented on short-term rentals due to housing shortage concerns. These regulations mandate that hosts register with the city and adhere to certain rules, such as being present during guest stays of less than 30 days and limiting occupancy to two guests at a time. 

Similar measures are being explored or enforced in other cities worldwide to tackle problems like escalating rents and over-tourism.

Airbnb has actively addressed these regulatory challenges by collaborating with governments and policymakers to create guidelines that consider the interests of hosts, guests, and local communities.

The company has introduced various measures, including thorough verification processes and dedicated customer support. Airbnb is also committed to responsible hosting and sharing anonymized data with cities, aiding in effective urban planning. This approach helps address issues concerning housing affordability, safety, and the impact of tourism on communities, all while maintaining privacy and respecting individual rights.

The regulatory landscape for Airbnb and similar platforms continues to evolve as cities and countries seek to mitigate the impact of short-term rentals on housing markets and communities while also reaping the economic benefits they provide.

Venture Capital Firms and the Short-Term Rental Market

Venture capital firms are increasingly targeting the short-term rental market, seeing it as a lucrative investment opportunity. For instance, the New York-based investment firm Saluda Grade has acquired about $500 million worth of short-term rental properties in partnership with AvantStay.

These firms are acquiring properties in strategic locations, targeting areas near major population centers where demand for short-term rentals is high. Their investment strategy is influenced by the desire to maximize yields from rental income and long-term property value appreciation.

This aspect makes the short-term rental market attractive for investors looking for immediate income and long-term financial benefits. This trend in venture capital investment reflects the evolving dynamics of the real estate market, where short-term rentals are becoming a significant sector.

Conclusion

While short-term rentals open doors for property owners to generate additional income and stimulate local economies, they also bring forth challenges that require careful navigation.  

As the trend grows, the need for thoughtful regulation and a nuanced understanding of its effects on the real estate market becomes increasingly important. 

As a real estate agent, you can leverage your expertise in local markets and regulations to cater to clients looking to invest in properties specifically for Airbnb rentals. And while at it, remember to partner with an Embrace Loan officer so you can offer your clients financing options when they are ready to make a purchase.