I RECENTLY returned from a trip to Japan. Travelling 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. 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.

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

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. 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.

McGill University urban planning professor David Wachsmuth recently looked at New York and concluded that Airbnb listings were rising in rapidly gentrifying neighbourhoods where rents have also been skyrocketing. But this could mostly be a coincidence – travellers may enjoy staying in hip, up-and-coming neighbourhoods.

As evidence that Airbnb is actually driving rent increases, Prof Wachsmuth cites a recent paper by three economists that if a given area is a big draw for tourists, with lots of F&B places, and that 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, the true impact of Airbnb on rents would be very small. 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. This means that the advent of Airbnb probably doesn’t require much of a policy change. Its small impact can easily be cancelled out simply by building a bit more housing. Tokyo itself has done this, with great success.

But the research paper also found 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 mini-hotels. If cities allow the latter, the effect on rents will probably be bigger.

One approach is to do what New York has done and simply ban commercial Airbnb operators. But, given the benefits for travellers, a smarter approach might be to allow commercial Airbnb operation but to tax and regulate it like the hotel industry. Finally, a tax could be applied to commercial Airbnb operations, with the proceeds used to fund affordable housing. Allowing regulated commercial Airbnb operations would allow travellers to enjoy a more home-like alternative to hotels, while mitigating or eliminating negative impacts on locals – a win-win situation. BLOOMBERG

The writer, a Bloomberg View columnist, was an assistant professor of finance at Stony Brook University.


Link to original article: https://www.businesstimes.com.sg/real-estate/dont-blame-airbnb-for-rising-rents-in-popular-cities