Banning Airbnb investor units, as Boston has done, reduces market values by up to 40% – but should other social goals dominate?
Recently Boston decided to ban Airbnb-type rental units, suggesting that the growth of such short-term rentals was reducing the supply of longer-term rentals while adding to the supply of visitor units competing with hotels. It is possible that tourism been increased by such rentals, which are slightly cheaper than staying in hotels and also accommodate seasonal peak demand – cities like Boston might get fewer visitors if hotel accommodation was all that was available. The flip side is that rental housing stock is reduced, and Boston, San Diego, San Francisco and New York have all experienced large rent increases as the supply of net new units has become increasingly limited. Political regulation and a series of more complex development barriers, as well as rising labour costs, have significantly increased in the past few decades across all US cities, resulting in cries of a housing crisis.
For pure property-rights enthusiasts, any reduction in the maximum productivity of a property is a reduction in value and a taking. From an investor point of view, the bid price on many properties was predicated on being within an area where short-term rentals were permitted. In discussions with investment brokers, we are seeing a differential value impact of about 40% in those markets where significant tourism exists.
A case example illustrates the value impact. Using a well-located one-bedroom unit in San Diego, the current Airbnb rent per week is $888 but the peak season rates are much higher, such that the average weekly rent on a year-round basis is about $1,190. There is a weekly cleaning fee of $100, a service fee of $101 and occupancy taxes of $109, all paid in addition to the short-term rent. The vacancy rate on the short-term rental is 30% of the year at maximum, and often less. If the same unit were rented on a longer-term basis, the rent would be $2,150 per month with 5% vacancy.
The effective gross income on the apartment unit is $24,510 for longer-term rental, against $57,120 for short-term rental. The operating expenses run higher on the short-term rental, at about 40% of effective gross income, against 30% for the longer-term rental, such that the annual net operating income for the short-term rental is $23,990, compared with $17,157 on the longer-term rental. Current cap rates are approximately 4.28% for these units, resulting in a value of approximately $560,000 for the short-term rental and $400,000 for the longer-term rental. The bottom line is that the type of restriction which Boston just imposed on owners results in a property value declining by as much as 40%. (The example above translates to a 29% reduction in value.)
That will cause some more recent buyers to walk away from loans and give these units back to the bank. Other owners may let the unit deteriorate and do little maintenance as they accept unexpectedly low returns on their investment. The older, lower-quality stock will remain and the newer stock will deteriorate faster than otherwise in this new environment of coerced supply. Critics of high housing costs may rejoice at this new regulation, but it is a partial interest property taking and one that does not require just compensation. It also adds risk to the housing market, which will drive up those cap rates going forward.
There are legitimate concerns for society at large that result from the growth of short-term rentals relative to the overall market. While short-term rentals provide a less expensive option than hotels and may add net new tourist demand, based on a lower-cost option, tourist growth does not produce many high-paying jobs for a local economy. It is strange that so many markets seem to want to expand tourism, especially in areas where housing is already unaffordable, as tourism growth only make the housing problem worse. To some extent, short-term rentals hurt the hotel industry too. In places where tourism is significant, and that includes most major cities, the transition from longer-term to short-term rentals reduces the supply of housing units, which reduces vacancy rates and drives up rents. At the same time, we should note that the transition of many owner-occupied housing units to rentals, whether short-term or long-term, has added to the rental stock such that single-family units now supply about one-third of all rental units, and this has helped to keep rents lower than otherwise.
Within a neighbourhood afflicted by a large share of short-term rentals, the permanent residents will have a number of complaints, including but not limited to:
- an increase in the number of loud parties at night (noise pollution), making it harder to sleep
- more rental cars filling up the streets as often the number of temporary residents in a rental unit exceeds the number that would normally live there
- the lack of permanent kids in a neighbourhood as visitors do not befriend locals
- more trash in the streets – and possibly more crime, as it becomes easier to slip into a neighbourhood unnoticed where transients are commonplace
- a general deterioration of the neighbourhood as the temporary residents do not care about contributing to local arts, culture and other activities.
States such as Hawaii have worked to define sustainable targets/levels for tourism relative to resort location, available infrastructure and resident population numbers. Airbnb effectively negates these efforts by promoting visitor accommodation in neighbourhoods not designed for the visitor industry.
The items listed above can be described as negative externalities, and they could have a negative impact on the wellbeing of those permanent residents who do not succumb to transitioning their home into a short-term rental and moving elsewhere. Short-term rentals could be legally encouraged in special zones, such that the negative externalities are concentrated, while other areas exclude short-term rentals. However, it may be politically difficult to get neighbourhood residents to recognise that they are in fact an optimal location for short-term rentals.
The real cause of high rental rates and high home prices is, of course, the challenge of adding supply in a not-in-my-back-yard world with increasing regulatory barriers. Short-term rentals are not the cause of this general lack of supply, but it seems they are, at the margin, behind a slight reduction in supply and as such a current target of politicians wishing to show they are trying to do something about housing affordability.
