The housing crisis’ Hamlet moment: to Airbnb or not Airbnb?

Airbnb dominates the short-term rental market, but the service’s success has started a new conversation: the company’s impact on housing affordability, also known as the “Airbnb effect.” But it's a layered conversation, Michael Seiler, professor of real estate and finance at the College of William & Mary, told Fortune. The real effect to pay attention to, he said, is what Airbnb does to long-term rentals.

Seiler decided to go deeper in his research, with co-authors—Purdue University economics professor Ralph Siebert and The Chinese University of Hong Kong real estate professor Liuming Yang—in a paper, “Airbnb or Not Airbnb? That is the Question: How Airbnb Bans Disrupt Rental Markets,” shared with Fortune. The paper is under revision for a top field journal in real estate, they said. The takeaway is clear, though.

“If people are renting their place out short-term, well then that place is now no longer available for long-term,” Seiler said. “So there’s a substitution effect, as we call it.”

In order to understand this Airbnb effect on long-term rentals, the authors focused on legislative bans on short-term rentals in general, and an Airbnb ordinance in Irvine, California, in particular. Irvine is one of the few cities that strictly enforces such regulation and actually prohibits Airbnbs in residential zoning areas. And to further enforce its regulation, Irvine works with a property technology company to monitor and detect violations.

Irvine is therefore an ideal case study. “Everyone wants to know the effects of Airbnb, that’s just a hot topic,” Seiler said. “But with our data ability, we can actually study this thing in a legit way.”

He explained that they were able to measure the effect using contracted long-term rental prices versus asking long-term rental prices, which previous Airbnb studies have used—despite the fact that anyone can ask for $10,000 per month for rent but that doesn’t mean that’s what they’ll get.

They found that the number of Airbnb listings in Irvine declined by 23.1% after the city’s short-term rentals ordinance—confirming that the ban was “effective and had a drastic impact on Airbnb activities,” the authors wrote.

So they dug a bit deeper and found that Irvine’s short-term rental ordinance led to a 2.7% decline in contracted long-term rental prices, on average—that amounts to $101 relative to the mean value and a reduction of $72 million in annual total rental spending. In other words, $3,749 rent is $101 cheaper in Irvine thanks to the city’s curb on the Airbnb effect.

When you take away Airbnbs, rents go down. Seiler told Fortune that was expected, considering there’s a supply side effect that’s cutting into the market, in that rents go down and rental units shift toward long-term rentals, which makes rent cheaper.

“You have oversupplied the market, so people stopped renting their property short-term [and] they started renting it long-term,” he said. “That’s an increase in supply, and therefore that should put downward pressure on prices, and it did.”

But it’s not just a universal thing, Seiler said. And that’s a bit more surprising, if not shocking.

“This is not true for all rental properties,” Seiler said. “It’s mainly true for those properties that lend themselves kind of in the sweet spot of what Airbnb does…that’s interesting because it’s a very specialized effect.”

What he means is that the decline in rents was more pronounced for long-term rental units that had similar property characteristics as those listed through Airbnb and those located in areas with greater Airbnb exposure before the ban was enacted.

Still, there’s a few things to consider rather than just looking at it as “better off for society” because short-term rental regulation reduced rents, Seiler told Fortune.

“This is a source of revenue for people,” he said. “So when you set a policy, like an Airbnb policy, you need to be really concerned with the consistency of it.” There’s people who buy real estate because they want to rent it out on the short-term, if that were to suddenly change, that money is gone.

“So we have to be really careful about the reversal of policies and letting something happen and then restricting or banning it all together because that could really mess with people’s personal budget,” Seiler said. “And I don't think enough folks think about that.”

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