Founded just eight years ago, Airbnb has become a $25 billion company that handles more rooms than any other hospitality entity on the planet. Suffice it to say: people like it.

Also suffice it to say that Airbnb—a textbook “disruptive innovation”—is sending shock waves through the hotel industry and beyond. One such shock wave is Airbnb’s potential to exacerbate the housing affordability crunch in high-priced cities. Advocates fear that short-term rentals (STR) offered through online marketplaces such as Airbnb and VRBO cut into the supply of long-term rentals (LTR), reducing the availability of housing and driving up rents for locals.

It’s a plausible apprehension, and it explains the waves of controversy that have overtaken Airbnb in New York City, San Francisco, Austin, Portland, and Vancouver, BC, among others. This year, the fear has roiled Cascadia’s largest city, Seattle.

In response, the Seattle City Council is considering new restrictions targeted at hosts who use Airbnb or similar services as a sort of mini virtual hotel to manage numerous STR accommodations located anywhere in the city. The key piece of the proposed legislation would prohibit hosts from renting a space for more than 90 days per year if it’s located on a property that is not their primary residence. Policymakers believe that capping the revenue from STRs in this way will encourage owners to offer their off-site units to long-term tenants instead, estimating that it could return 300 units to Seattle’s LTR pool.

The proposal is intuitively appealing. It suggests a way to prioritize local renters over “well-heeled” visitors. Unfortunately, this rush to smack down Airbnb is unwarranted. No one yet knows if Seattle’s housing affordability would get better or worse from the rule. To impose regulations now would be premature at best. The appropriate action is to watch and study.

The meteoric rise in popularity of online STR services speaks for their tremendous value to both hosts and guests. Meanwhile, data confirming any negative impact on housing affordability are lacking.

But more importantly, what policymakers may be missing is that web-based STRs, LTRs, and hotels are each interrelated components of the same citywide housing market, each utilizing the same basic resource: bedrooms. Restricting a specific type of STR will have the unintended but unavoidable consequence of shifting demand to bedrooms elsewhere in the city. It’s like sticking your finger into a balloon: it just bulges out everywhere else. And that’s why regulating away Airbnb units is unlikely to yield any net gain in housing affordability for Seattle.

What we know (and mostly don’t know) about Airbnb’s influence on local housing markets

Anecdotes abound of people taking LTRs off the market and using them for Airbnb instead—or even worse, of premeditated evictions to clear out long-term tenants and make way for more lucrative STR guests. Any reduction in long-term rental supply increases rents, while economic evictions traumatize families and fray the community fabric. In rapidly growing cities, enacting policies that prevent these serious harms would serve public interest, no question.

Whether or not Seattle’s proposed restrictions would achieve the desired outcome, however, is an open question. There is a paucity of non-anecdotal data on the potential relationships between Airbnb and affordability. Without solid data to untangle the complex web of the housing market, we can only speculate about what the proposed regulations would do for net housing supply.

What we do know is that home-sharing services such as Airbnb offer big benefits to both hosts and tenants, including not only monetary value, but also flexibility, choice, convenience, and cultural enrichment. On top of those personal perks, we also know that home-sharing delivers sustainability dividends to the greater community by enabling more flexible and efficient use of existing housing resources.

In Seattle on any given night, more than one in four bedrooms lie empty. Those rooms are heated, plumbed, painted, furnished, and provided with bathroom and kitchen access. Channeling the growing demand for STRs into these unused rooms decreases demand for hotel rooms—and consequently the demand for urban building lots zoned to allow new hotels—and eliminates the carbon footprint associated with building and operating those new hotels.

Hotels are also inherently less flexible because their rooms are designed for a single purpose and not easily converted to LTRs. Houses and apartments, in contrast, tend to be adaptable for either STRs or LTRs.

We also know that housing markets in North America are extremely rigid and inflexible, discouraging all manner of inexpensive housing that could otherwise be helping to ease the affordability squeeze. Cities impose legal barriers to roommates, rooming houses, in-law apartments and backyard cottages, micro-housing, tiny houses, and townhouses, and put far too much land off-limits to anything but single-family houses. Regulating Airbnb ratchets down flexibility in the housing market even more, moving things in the wrong direction for affordability.

But much is still murky about the dynamics of Airbnb. To the point: no one can predict how hosts of off-site STRs will respond to a 90-day rental limit. Some may switch to LTR as policymakers assume. For one counterexample, though, consider the scenario of a family that owns a second home it uses to spend summers in Seattle. That family would never put their home on the LTR market, and with a 90-day restriction the house would then sit empty for six months a year—a waste of resources and a lost opportunity for soaking up demand for short-term accommodations.

Or consider the couple that decides to live together on a trial basis, using Airbnb to generate income from his home and live in hers while they decide whether they’re meant to be together for the long term. He will not put his place on the long-term market, because he may need it soon. The regulation could force them to leave his unit empty, again wasting resources and foreclosing short-term housing options for others.

Similarly, no one knows how often Airbnb catalyzes the conversion of unused rooms or units into new LTRs. The prospect of Airbnb income has inspired countless hosts-to-be to upgrade an underutilized space for STR. Anecdotally, some of them find it a hassle to be inn-keepers—managing an ongoing stream of new tenants, cleaning the linens every few days, and so on—so they switch their spaces to LTR, increasing the supply.

At a larger scale, the expectation of additional income from Airbnb hosting could already be motivating the construction of whole new apartment projects or expanding their size. Likewise, the existence of Airbnb may be encouraging families to rent or buy houses and apartments with fewer bedrooms, knowing that they do not need guest rooms when dozens of neighbors offer rooms through Airbnb. Is Airbnb therefore allowing the whole housing market to slightly downsize its demands, freeing up larger houses and apartments for larger households?

Reporting and enforcement introduce another layer of uncertainty to the cost-benefit equation of restrictions. Monitoring and inspecting thousands of Airbnb units would require significant city resources. Regulations perceived as unfair and unenforceable are routinely flouted in all parts of life, and other cities’ experience suggests Airbnb rules may fall in that category.

In 2015, Portland passed an ordinance requiring STR hosts to get permits for their listings, but less than 10 percent of hosts met the city’s deadline to do so. A similar story played out in San Francisco, and the city recently responded by imposing a $1,000 per day fine on STR websites that offer listings not registered with the city. The need to resort to such draconian measures suggests a policy out of touch with reality.

Seattle’s Airbnb legislation: Let’s do some math

Seattle’s proposed legislation targets “commercial” hosts—those who list multiple whole apartments or houses on Airbnb, as opposed to those who make a bit of extra income off a spare bedroom. To make the distinction, policymakers assume that any STR not located on the property of the host’s primary residence is a commercial listing: “Rentals past the cumulative 90 nights where the operator does not live on site are business ventures and deserve to be regulated and restricted as such.”

To be clear though, “restricted” means hosts are prohibited from renting off-site units more than 90 days per year. The intent is straightforward: if hosts are prevented from earning more than 90 days’ worth of STR income per year, offering the unit as a traditional long-term rental becomes the more lucrative option. How many units might this restriction convert?

Airbnb’s data for Seattle show that only 22 percent of “entire homes” listed are rented out 90 days per year or more, amounting to 630 Airbnb units suitable for LTR that the proposed 90-day restriction would impact. The fraction of those 630 units that hosts would convert to LTR depends not only on the financial equation but also on the hosts’ personal priorities. For some hosts, the value of keeping the unit available for family or personal needs will outweigh the loss of rent income. To assess the financial incentive, Airbnb estimated that 296 of its STRs rent for enough days per year to generate more income that could be earned annually from a LTR, based on current Seattle rents.

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    • Six hundred units is less than half of a percent of the total rental units in Seattle, and as Peter Orser, director of the University of Washington’s Runstad Center for Real Estate Studies, noted, it’s unlikely to “make a significant inflationary impact on housing prices.” That said, in the battle against displacement, every additional home matters. However, there are reasons to question whether the proposed restriction would yield even that number of additional LTR units.

    The fundamental flaw in the rationale for restrictions is that demand for STRs won’t disappear if the supply of STRs offered through services such as Airbnb is cut back. Where would the unmet demand for STRs go? The prime suspect, of course, is conventional hotels. But here’s the catch: when there is more demand for hotels, more hotels get built. Hotel and apartment developments compete for the same scarce urban land, so more new hotels means fewer new apartments, and fewer apartments means higher rents. If so, then STR restrictions may be a zero-sum game for affordability.

    The only reason it wouldn’t be zero-sum is if Airbnb creates its own STR demand—that is, if some Airbnb users would not travel to Seattle if Airbnb didn’t exist. Surprisingly, several studies (here, here , here) have found that the growth of Airbnb has had little impact on hotel revenues, suggesting that Airbnb does in fact expand demand from out-of-town visitors. Because Airbnb tends to offer relatively cheap accommodations, lower-cost hotels are likely to feel any such pinch the most. And it makes sense that Airbnb could entice a handful of casual, low-budget tourists to travel when they otherwise couldn’t afford it.

    On the other hand, intense support from both the corporate hotel lobby and hotel worker unions for restrictions on home-sharing platforms is perhaps the best evidence that conventional hotels and Airbnb compete for the same tenants. Why would the hotel industry be making so much noise about Airbnb if it weren’t a threat?

    In any case, not all STR tenants are casual, low-budget tourists. According to Airbnb, 31 percent of Seattle guests visited for reasons other than vacation or leisure. Those other reasons include family visits, business, conferences, short-term housing during relocation, and job-seeking—visits that would happen with or without Airbnb. Of the leisure travelers, surely a majority wouldn’t give up their chance to ascend the Space Needle just because they would have to stay at a generic Holiday Inn.

    The push-pull competition between new hotel development and new apartment development may not be a pure one-to-one relationship, but the two are strongly coupled. In higher-density areas of Seattle, hotels and apartments are commonly located in close proximity (see the photo above) or even within the same building. In lower-density areas, hotels are less common than apartments, but even if there are locational mismatches, STR demand will find the hotel supply wherever it’s located, just as it did before Airbnb. (This highlights a side benefit of Airbnb: it spreads lodging options throughout the city.)

    Hotel and apartment real estate development processes have different risk profiles, timelines, and other quirks, but over the long term, these marginal effects balance out. More hotel demand generated by shutting down Airbnb units will result in fewer apartments, and less hotel demand generated by leaving Airbnb alone will result in more apartments. The magnitude of these effects, like most other questions about Airbnb and housing affordability, remains unknown.

    To b or not to Airbnb? That actually shouldn’t be the question.

    In cities struggling to maintain housing affordability, the explosive growth of web-based short-term rental services such as Airbnb and VRBO warrants serious consideration. But given the newness of the trends, the lack of data, the relatively small number of housing units at stake, and the uncertainties over how shifts in STR demand would percolate through the whole housing system, enacting new restrictions would seem hasty and premature.

    Seattle Times columnist Jon Talton nails it: “Would [the proposed restrictions] deliver on a promise to free up more apartments for long-term leases in a growing city? Maybe at the margins, but unintended consequences occur.”

    The efficacy of affordable housing policies hinges on their working in concert with the fundamental reality that demand drives everything. Like Cascadia’s other great cities, Seattle is in the midst of a huge surge in housing demand as its population and incomes swell. Trying to micromanage the duration of people’s stays in different dwellings across a city of hundreds of thousands of homes neither stems this demand nor satisfies it. Because housing and hospitality compete for the same scarce resources—urban land and bedrooms—restricting STRs is like rearranging deck chairs on a ship that has already plowed into the iceberg of the housing shortage.

    Seattle would better serve its needs by embracing the spirit of the Housing Affordability and Livability Agenda: open up the housing market to more supply and flexibility while steering the resulting growth toward equity and affordability. For STRs, that means simply following HALA’s recommendation (see R.9): a tax on STRs dedicated to affordable housing subsidies.

    The real work we must pursue on affordability is putting more new roofs over people’s heads. And if Seattle—and other cities—could successfully address the housing shortage, few people would care one way or the other about Airbnb.

     

    Thanks to senior research associate Margaret Morales, who contributed research to this article.