Banning the short-term rental of properties through such companies as Airbnb affects a locality’s long-term rental market, according to a recent paper co-authored by a William & Mary business professor. The paper offers important information for policymakers and those looking to invest in rental property.
The research comes at a pivotal time as localities across the country grapple with the relatively new short-term rentals phenomenon and determine whether to allow or restrict leasing programs like Airbnb. The paper, “Airbnb or not Airbnb? That is the question: How Airbnb bans disrupt rental markets,” was published in Real Estate Economics.
“Policymakers need information in order to make what they think is the best decision right now,” said Michael J. Seiler, J.E. Zollinger Professor of Real Estate & Finance at William & Mary’s Raymond A. Mason School of Business. “This paper provides them with quantifiable information, whereas before it was just kind of fuzzy.”
Seiler co-authored the paper with Purdue University Professor of Economics Ralph Siebert and Chinese University of Hong Kong Assistant Professor of Real Estate Liuming Yang.
Long-term effects of short-term rental bans
Understanding the potential impacts of policies that allow or ban short-term rentals is vital for policymakers and consumers, according to Seiler. This emerging and rapidly developing segment of the rental market is competing with hotels, giving both property owners and renters more options and affecting real estate in ways that continue to be studied.
For this study, the researchers looked at Irvine, California, which currently has a policy that bans short-term rentals.
Among their findings, they discovered that the ban drove prices on long-term rental properties down 3% within approximately two years.
The paper also found that banning or allowing short-term rentals in one neighborhood had a spillover effect, meaning people would instead buy property for conversion to rentals in adjacent neighborhoods that would affect the one with or without the policy in various ways.
Unique to the study was that researchers used actual contracting rents instead of asking rents, which past research has used, according to Seiler. That was why the data, which was obtained for free from CoStar and Zillow, was more valuable and researchers could answer so many more questions.
Researchers are trying to obtain more specific Airbnb data, but it’s not readily available because the company considers it proprietary and uses it strategically in competition with other companies, according to Seiler.
“Any time we can get lucky or buy a data set or have a relationship with someone at Airbnb who will let us do the study, that is an advantage and that will allow us to gain insight,” Seiler said. “If we can get more data, we’ll write more papers.”
Considerations for property owners
The average person looking to invest their extra income in a rental property or an owner deciding whether to rent to short or long-term tenants should take all risk factors into account, Seiler said.
“When you do the short terms, you’re going to be faced with a world of uncertainty,” he said. “Long-term rentals have been around for quite some time. Short-term rentals are very much more ambiguous. And there are certain personalities that can deal with that, and certain ones that can’t.”
Seiler noted that’s because localities that currently allow short-term rentals may ban them in the future as information becomes available and problems become clearer. Running all of the numbers for one revenue stream and not any others makes it hard to mitigate risk, and pivoting from short-term to long-term isn’t necessarily that easy, he added
“Airbnb is a hot button for people,” Seiler said.
Not only are neighbors and homeowners’ associations becoming vocal about their preferences, well-informed hotel chain officials and groups of active business owners and hotel managers have influence that can shape or change policies as they are being formed.
“Rental policy can absolutely ruin your financial plan,” Seiler said. “That’s the only reason you bought this house — as an investment and you never planned on living there. And now this investment’s revenue just went out the window.”
That one variable can determine the value of the investment.
“I can tell you this from a nerd who builds financial models, it can become really uncertain in terms of how much is this really going to pay off,” Seiler said. “Is it going to be hugely profitable or hugely unprofitable? And that one decision alone — whether short-term rentals are allowed — can flip that number big time.
“Yes, you can pivot and convert to a long-term rental. But you didn’t run the numbers on that. So, the first lesson would be you better run the numbers both ways and then try to assign a probability that you just might not be able to do short-term, even if you can right now.”
Influencing policy
For policymakers, knowing the potential benefits and pitfalls of allowing short-term rentals will result in policies that benefit the most residents, though Seiler cautioned there are always unintended consequences that negatively affect at least a few people.
Some people want short-term rentals allowed because they want to use them to make money. Others don’t want them because of fears of possibly increased crime rates and a decrease in the esthetics and reputation of the neighborhood, according to Seiler.
The paper also quantifies some of the pros and cons of allowing or banning these rentals.
For example, banning short-term rentals and forcing property owners to rent the homes out long-term creates a greater supply of long-term rentals, which should push down prices. This creates a slightly lower rental price for someone who wants to rent for a year but affects the revenue of the property.
“On the one hand, you might think that people would pay more for a property because it’s revenue-generating,” Seiler said. “And if you’re willing to pay more for a property, that raises the tax base. And these local governments obviously want a greater tax base. So that’s good for them. But, at the same time, having higher prices makes those homes less affordable.
“So, what do they prefer — a bigger budget or for people not to be able to afford a home in a neighborhood? There’s no right answer to these questions.”
The impacts of policies are mostly seen on properties of a size and in a location that makes them ideal for Airbnb listing, but not housing overall.
“There are some results that people had not previously thought about; there are conversations we had not heard before,” Seiler said.
Editor’s note: Data is one of four cornerstone initiatives in W&M’s Vision 2026 strategic plan. Visit the Vision 2026 website to learn more.
Jennifer L. Williams, Communications Specialist
