How Is Airbnb Affecting Local Rental Prices?

Without a doubt, Airbnb has transformed the rental industry.

While designed for travelling with its 90-day cap on bookings and listings, many countries and cities are concerned with how Airbnb is affecting the tourist trade and the property market. Bans for Airbnb are in place Palma and Ibiza while Berlin, Paris, New Orleans, Amsterdam and New York are just a few that are also imposing strict restrictions.

So, are these cities right to ban Airbnb and how exactly is Airbnb affecting local rental prices?

The rise of the micro-entrepreneur

While many cities and countries looked at Airbnb as a negative for their economy, the UK seemed to encourage it. There is no ban or over-regulation in place. In fact, the government called the use of Airbnb a breed of micro-entrepreneurship. They even offered a £1,000 tax-free income allowance for these micro-entrepreneurs. This not only covered income from Airbnb but also other online activities, such as eBay.

Planning permission

Airbnb has a 90-day cap on listings.

If people let out their property in the UK for more than 90-days, then they require planning permission. As each council limits the number of holiday lets available, you need to seek planning permission for short-term letting. If you don’t receive planning permission and found in breach of the short-term letting rules, then landlords could face a £20,000 fine. For landlords, this means a difficult dilemma; offering short-term rentals while demand is high or competing against Airbnb.

Local rental prices – The growth in London

It is no surprise that London is a city where the use of Airbnb is growing rapidly. Furthermore, it is becoming a professional activity; with the number of hosts who have more than one property trebled in 2016. It is estimated that London has 20,000 Airbnb rentals a week and around one million rentals in total. As demand for property remains strong, many people don’t believe that rental prices are suffering. However, the shift to short-term rental has left some landlords struggling to compete.

Rental price deflation in the UK

While many places in the UK have noticed a steady, but slow increase in rental prices over the last few years. Some regions have noticed that rental rates are decreasing. Experts believe the local rental price deflation is due to a number of factors. Some reasons for the decrease in rental prices include the uncertainty over Brexit, location desirability and the competition of the long-term rental market.

Cities such as Brighton and Oxford saw a 1% decrease in rental prices in 2017. Larger regions also experienced a drop with Edinburgh, Glasgow and Greater London also suffering from a reduction of local rental rates.

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The problem for landlords

If rental prices continue to fall, landlords may suffer. There are many costs associated with being a landlord. A landlord must cover their mortgage, maintenance and repairs, property management, advertising and marketing as well as landlord’s insurance. All of these costs must be factored in when determining a rental price that will make the venture profitable.

If rental prices continue to decrease, then it may not be profitable for the landlord to keep renting their property out. In turn, this could lead to lack of available long-term rentals. Coupled with the fact that landlords are now facing higher tax bills for rental income, and the short-term market and Airbnb are dominating the industry; landlords are facing increasing amount of pressure.

Is there a solution?

With the Airbnb effect taking hold, it might not be long before the government start to impose tougher regulations on Airbnb and the short-term let market. This may help with rental market regulation and may benefit landlords in the future. However, this may not happen, and nobody knows how much rental prices have to drop before any action takes place.

Another solution for landlords is to create a mixed strategy for rental properties. This means offering a mix of short and medium term lets and well as long-term rents. It is important first to seek the right planning permission as there are regulations in place for holiday lets. However, landlords may find a high profit is generated during peak tourist seasons.

During peak holiday seasons, landlords can command a higher nightly rate for their properties. During low season, it may be best to mix medium and long-term rentals at a much lower rate but at least a guaranteed income. With a mixed strategy, landlords need to prepare for perhaps a higher level of property management and planning; however, with the short-term market in high demand, the potential returns could be high.