#19 The Airbnb effect

I recently read about how Airbnbs create a crisis for the local housing markets. I have always been puzzled by how real estate markets work and hope this is the first of many attempts to figure it out.

In this edition, I want to talk about how the company Airbnb works and what effects it has on the local housing market.

Airbnb is an online marketplace (e-commerce website where product/service information is provided by multiple third parties) that connects people who want to rent out their homes to people looking for accommodations in specific locations. The people renting out their homes are called hosts. Airbnbs are mostly favored because they are often considered cheaper and homelier than hotels. Airbnb makes money by charging guests a service fee while booking, as well as a cut of the commission charged to hosts. The company started in 2008 and went public with an IPO in 2020.

So, let’s break it down.

Airbnbs are essentially part of the short-term rental market, which means shorter stays. They are cheaper and homelier than hotels, making them attractive to tourists. This is also beneficial for hosts, who can earn significant income from renting their places out. But who does it negatively impact?

The other residents of the area.

In major cities such as Amsterdam, Barcelona, and Los Angeles, the “over-tourism” caused by the cheap rentals negatively affects housing prices as well as local communities.

Landlords are more inclined to shift to Airbnb because they stand to make more money. This causes a decrease in the supply of long-term rentals. And when the supply decreases, the prices increase.

For example, rent prices for long-term rentals have increased significantly in London, which has over 71,000 Airbnb listings, the highest in the world.

In cities and areas with many Airbnb listings, housing prices have also increased significantly. This increase in price can be attributed to demand-side factors as well. Many people start buying properties in these areas intending to list them on the platform, which drives housing prices up.

The influx of rentals also causes “gentrification” in local neighborhoods, where tenants might be forced to leave because they can no longer afford the rising rents.

So, while Airbnbs certainly provide economic benefits for hosts and offer affordable lodging for tourists, it can lead to higher housing costs and reduced availability of long-term rentals for local residents. This dual effect creates a complex scenario where the economic advantages must be weighed against the social and housing market challenges. Many cities across the world continue to grapple with these issues, calling for balanced regulations and policies which can ensure sustainable growth and housing affordability.

I plan to write more about the real estate market and taxes, two areas where I struggle the most 🫠.

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