Don’t blame Airbnb for rising rents in popular cities

I recently returned from a trip to Japan. I’ve been going there for many years, so I can confirm that traveling in that country – especially for longer periods of time – is infinitely easier than it was just a decade ago. One of the main reasons is Airbnb. Ten years ago, lodging in Japan was limited to overpriced hotels or unreliable Craigslist sublets. Now, with a few button clicks on a smartphone or laptop, you can book a reasonably priced, centrally located private apartment with all the furnishings of a well-kept Japanese home. A portable Wi-Fi unit is often included, allowing you to dispense with the need to pay for an international cellphone data plan.

Airbnb’s success in Japan is due in large part to the government’s far-sighted embrace of the room-rental service. In mid-2017 the government passed a law legalizing Airbnb, subject to the approval of local authorities. Japanese apartment owners can rent out their rooms for up to 180 days out of the year – much more than in many other cities. This leniency is just one factor powering a record boom in tourism to the Land of the Rising Sun:

Even as tourism to the U.S. falls, Japan is raking in tens of billions of dollars a year from foreign visitors.

It’s not just Japan, though – Airbnb is probably making travel easier all over the world. A recent National Bureau of Economics Research working paper by Chiara Farronato and Andrey Fradkin used a simple supply-and-demand model of the short-term rental market to argue that Airbnb has held down hotel revenues, making short stays cheaper everywhere that the company operates. Meanwhile, the company’s revenue continues to increase rapidly.

But not everyone is happy about Airbnb’s rise. The hotel industry is understandably upset about intensified competition. Some long-term renters are also upset about the possibility of having a rotating cast of potentially noisy, disruptive or even criminal houseguests flowing into and out of their buildings. And, perhaps most importantly, many cities and their residents are worried that Airbnb and similar services are pushing up rents.

The mechanism is simple. Each apartment or house reserved for Airbnb rentals means one less unit for long-term residents. By taking supply off the market, Airbnb could potentially raise costs. Even a small rent increase could be politically explosive.

It’s hard to measure how big Airbnb’s impact really is, though. McGill University urban planning professor David Wachsmuth recently looked at New York and concluded that Airbnb listings were rising in rapidly gentrifying neighborhoods such as Bushwick and Bedford-Stuyvesant in Brooklyn, where rents have also been skyrocketing.

As evidence that Airbnb is actually driving rent increases, Wachsmuth cites a very recent paper by economists Kyle Barron, Edward Kung and Davide Proserpio. Barron et al. reason that if a given area is a big draw for tourists and if that area receives a sudden surge in online search interest for Airbnb, then any subsequent jump in Airbnb is caused by increased demand from visitors for short-term rentals.

Under this assumption, Barron et al. find that the true impact of Airbnb on rents is very small. A 1 percent increase in Airbnb listings, they found, raises rents by only 0.018 percent. Doubling the number of Airbnb listings would raise rent by less than 2 percent overall. The effect is so small that in their presentation at the American Economic Association meeting in January, the authors referred to it as a “zero effect on rental rates” overall (though the effect isn’t necessarily zero in all areas).

This means that the advent of Airbnb probably doesn’t require much of a policy change. Its small impact can easily be canceled out simply by building a bit more housing.

But that’s not quite the end of the story. Barron et al. also find that one reason Airbnb’s impact is so small is that most people offering rentals are owner-occupiers sharing their own residences, rather than commercial operators operating fly-by-night minihotels. If cities allow the latter, the effect on rents will probably be bigger.

One approach is to do what New York has done and ban commercial Airbnb operators. But, given the benefits for travelers, a smarter approach might be to allow commercial Airbnb operation but to tax and regulate it like the hotel industry.

Allowing regulated commercial Airbnb operation would allow travelers to enjoy a more home-like alternative to hotels, while mitigating or eliminating negative impacts on locals – a win-win situation.

Smith is a Bloomberg View columnist.