The sharing economy represents a set of peer-to-peer online marketplaces that facilitate matching between demanders and suppliers of various goods and services. The suppliers in these markets are often small (mostly individuals), and they often share excess capacity that might otherwise go unutilized. Economic theory would suggest that the sharing economy improves economic efficiency by reducing frictions that cause capacity to go underutilized, and the explosive growth of sharing platforms like Uber and Airbnb testify to the underlying demand for such markets. The growth in the sharing economy has caused great disruption to traditional markets, leading to contentious policy debates about how best to balance individual participants’ rights to freely transact, the efficiency gains from sharing economies, the disruption caused to traditional markets, and the role of the platforms themselves in the regulatory process.
Home-sharing in particular has been subject to intense scrutiny. Namely, critics argue that home-sharing platforms like Airbnb raise the cost of living for local renters. It is easy to see the economic argument: by reducing frictions in the peer-to-peer market for short-term rentals, home-sharing platforms cause some landlords to switch from supplying the market for long-term rentals—in which residents are more likely to participate—to the market for short-term rentals—in which non-residents are more likely to participate. Because the total supply of housing is fixed or inelastic in the short run, this drives up rental rates in the long-term market.
In a new paper, titled “The Sharing Economy and Housing Affordability: Evidence from Airbnb,” Professors Edward Kung (UCLA), Davide Proserpio (USC), and former UCLA student Kyle Barron, empirically investigate whether or not the rise in home-sharing has raised housing costs. Using 5 years of listings data scraped from Airbnb, the researchers show that a 1% increase in Airbnb listings is causally associated with a 0.018% increase in rental rates and a 0.026% increase in house prices. In aggregate, the growth in home-sharing through Airbnb can explain 0.59% in annual rent growth and 0.82% in annual price growth.
Two additional results shed light on the underlying economics of home-sharing. First, the researchers show that the effect of Airbnb on rents and prices is decreasing in the owner-occupancy rate of the neighborhood. This is because non-owner-occupiers are the homeowners who are on the margin of switching from supplying the long-term rental market to the short-term rental market. Owner-occupiers are always in the long-term market (they rent to themselves), and primarily use Airbnb to rent out excess capacity, but this action does not reduce supply in the long-term market. Second, the researchers show that the effect of Airbnb on house prices is generally stronger than the effect on rents. This is because the effect of home-sharing on prices happens through two channels. First, prices increase because the increase in rents gets capitalized into the house price. Second, prices increase because home-sharing increases the ability for homeowners to utilize their excess capcacity, such as unused rooms, or time in which they are away from the house on vacation.
The results of the paper should help inform policymakers as they debate how to best regulate home-sharing. For example, the results suggest that concerns about Airbnb raising housing costs for local residents are not unfounded. However, the results also suggest that Airbnb improves the efficient use of housing by helping homeowners better utilize their excess housing capacity. One policy implication would be that home-sharing regulations should at most seek to limit the reallocation of housing stock from the long-term to the short-term markets, but it should not discourage the sharing of primary residences by owner-occupiers.