Short-Stay Rentals and the Property Market – A help or a hinderance?

Recent years have seen an incredible explosion in the popularity of ‘short-stay’ rentals. Sites like Stayz, Vrbo and Airbnb have made it extremely simple for investors to experiment with short term renting in favour of conventional, long-term, rental agreements.

On paper, the theoretical benefits of short-stay rentals to the investor can be considerable:

1. Higher rental income:

Short-stay rentals may offer the potential for higher rental income compared to long-term rentals due to the ability to charge premium rates per night and secondary fees – akin to a hotel or other types of accommodation.

2. Flexibility in personal use:

Investors can use the property themselves for personal vacations or visits during periods of low demand, offering greater flexibility and utility from the property.

3. Adaptability to market conditions:

Investors can quickly adapt to changing market conditions and adjust pricing, amenities, and marketing strategies to maximise profits. Investors may also be able to capitalise on seasonal trends and peak seasons by adjusting prices accordingly.

4. Reduced risk of long-term tenant issues:

Unlike long-term rentals, shorter guest stays reduce the risk of problematic long-term tenants, lease violations, and eviction processes.

5. Lower vacancy periods:

Short-stay rentals often experience shorter vacancy periods compared to long-term rentals, as they are in higher demand, particularly in popular tourist or business destinations.

So, in exchange for the added risks of forgoing a long-term rental agreement, it’s not hard to see why investors might opt for the short-stay approach.

However, in Australia and elsewhere, governments have begun to crack down on the short-stay market, imposing tenancy caps, taxes or even occupancy requirements.

So, it begs the question – what has been the effect of short-stay rentals populating the market? How are property prices and traditional rentals affected, and is regulation necessary?

In a 2021 study, a Dutch research team identified three hypotheses for how short-stay rentals may affect the property market:

1.Efficient Use Effect:

Short-term rentals generate income from idle otherwise vacant housing, increasing value due to additional income opportunities. This should create an efficiency gain that spurs housing demand, which increases house prices.

2.Rental Housing Supply Effect:

Short-term rentals may cause a reduction in the supply of traditional rentals – increasing typical rental yields.

3.Externality Effect:

Short-term rentals may create negative nuisance externalities, lowering property values – i.e., if neighbours fear turnover, unfamiliar people or the ‘touristification’ (i.e. tourism-induced gentrification) of their neighbourhoods, demand for housing in the area may decrease.

Examining the Los Angeles property market as a case study, the research team used sophisticated causal inference techniques to isolate the effect of short-stay rentals upon capital growth over time.

Several fascinating trends were observed:

The effect of short-stay rentals upon capital growth varied considerably across locales but was reliably positive.

In tourist-heavy areas, short-stay rentals had an overwhelmingly positive impact on capital growth.

The housing supply effect hypothesis was largely found to be true – short-stay rentals did cause an increase in rents for traditional rental properties, by impacting supply.

Government regulations limiting the use of short-stay rentals were detrimental to property price growth.

Despite the overseas context, several similar studies in cities around the world corroborate these trends, as University of Sydney professor Nicole Gurran affirmed in an article:

“The international research on the impact of these rentals is clear: when landlords ‘host’ tourists rather than residents, housing supply is depleted, rents rise and neighbourhoods change.”

Interestingly, Professor Gurran also suggests that despite the perceived capital growth benefits of short-stay rental deregulation, Australia’s ongoing rental crisis warrants regulatory action:

“Given Australia’s dire shortage of rental housing, restricting short-term rentals seems like a no-brainer. New research published this week showed the share of rental properties under $400 per week has fallen to 15% in most capital cities – half of what it was a year ago.”

However, with clear correlations amongst the data, Australian researchers appear to be far from consensus concerning the role of short-stay rentals.

As University of Queensland geographer, Dr Thomas Sigler, posited in one realestate.com article:

“There is little evidence that short-term rentals contribute to the current rental crunch we are facing. Nationwide, we’re talking about less than 3% of the housing stock. If you then subtract those that are made to be short-stay apartments, such as beachside units, we’re talking about 1% of the nation’s housing stock.”

In support of Dr Sigler’s thinking is the trend in short-stay rental numbers over time. Since peaking at ~400,000 during 2019, short-stay rentals in Australia have declined 30% to just ~260,000 nationwide.

So, while it’s clear that short-stay rentals do typically have a positive impact on both capital growth and rental yields, the question of regulation remains an important one – particularly within Australia’s current economic landscape.

The extent to which short-term rentals are responsible for the ongoing rental crisis remains an interesting debate, with state governments around the country continuing to study the impacts of short-stay rentals. Rightly or wrongly, it seems that further government intervention is yet to come, and this will be an interesting topic for investors to continue to monitor.

Want to discuss this further?

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