How Airbnb is fuelling gentrification in Toronto

A new study sheds light on how short-term rentals like Airbnb make housing less affordable. (Shutterstock)

Iman Sadeghi, McMaster University and Sourav Ray, University of Guelph

The average asking price for a rental unit in Canada reached $2,042 in June, marking a 10.2 per cent increase from 2022. Metropolitan districts are particularly affected by rising rental costs, with some local families forced to relocate due to a lack of affordable housing.

Not surprisingly, some are pointing to Airbnb as one of the reasons for the rental crisis. Airbnb says it is not the cause of the housing affordability crisis.

Despite the significant public interest in how short-term rentals like Airbnb might make housing less affordable, empirical evidence of exactly how, and to what extent this is happening, is sparse.

Our preliminary study of Toronto’s rental market and Airbnb listings from 2015 to 2020 suggests there are two ways Airbnb is affecting the rental market: reducing the number of available rentals and contributing to the gentrification of neighbourhoods.

How Airbnb leads to gentrification

Short-term rentals, like those offered by Airbnb, bring in outsiders, often with little regard for local community norms, leading to conflicts and complaints.

While dealing with these temporary disturbances is usually possible with traditional policing and communication, they can have lasting impacts on neighbourhoods.

Airbnb affects the rental market by reducing the number of available rentals and contributing to the gentrification of neighbourhoods. (Shutterstock)

When homeowners convert their properties into Airbnb rentals, it reduces the long-term rental supply in their neighbourhoods. This increases rental prices, stretching the budget of lower-income families.

The lucrative short-term market also attracts new housing investments targeted at Airbnb rentals. This further squeezes local families, who find themselves in bidding wars. Eventually, the economic pressure forces these families out of their neighbourhoods, leaving only the wealthier population in place.

Property values increase as vacated homes are filled by wealthier families moving in from outside, who can afford the high prices. Over time, the neighbourhood changes to comprise mostly relatively wealthier citizens in a process called gentrification.

Airbnb driving up prices in Toronto

With 6.6 million active listings spanning over 220 countries and 100,000 cities, Airbnb offers three types of accommodations: entire homes or apartments, private rooms and shared rooms.

Our analysis focused on the entire homes or apartments category. Owners of these accommodations were able to choose between the long-term and short-term rental markets, but those who only rented out a portion of their residence were less likely to be part of the long-term market.

We found that Airbnb rentals can squeeze out long-term rentals in neighbourhoods. As the number of Airbnb rentals in a neighbourhood increased, the availability of long-term rentals decreased and vice versa.

A graph comparing a) excess supply in the long-term rental market to b) the ratio of new Airbnb listings relative to the supply of long-term rentals. (Iman Sadeghi and Sourav Ray), Author provided

On average, when the number of Airbnb listings per square kilometre increases by one per cent in a district, long-term rental rates go up by 0.09 per cent. This impact is significantly higher than a similar study conducted in the United States, which found an increase of 0.018 per cent.

We found evidence that Airbnb leads to higher potential rent income for property owners. This difference in income between the potential short-term rentals and traditional long-term rentals, known as the rent gap, draws investors to properties that can be used for short-term rentals.

The reduced availability of long-term rentals can lead to bidding wars for housing, which can lead to even higher rents. We found that a 10 per cent increase in this rent gap led to a 3.58 per cent surge in long-term rental prices. This is equivalent to a $92 monthly rent hike for the average one-bedroom property in Toronto.

The average rent gap in Toronto from 2015 to 2020. (Iman Sadeghi and Sourav Ray), Author provided

Mixed social impact

Despite evidence that Airbnb contributes to rising rents, its broader social impact remains controversial.

For homeowners, Airbnb offers a new income source. Travellers can boost local employment opportunities as retailers, restaurants and other businesses cater to their needs. A flow of young people can energize neighbourhoods with their joie de vivre and creativity.

Yet affordable housing is a basic need for our society. With over 40,000 listings in Toronto, Vancouver and Montréal, Airbnb is a big player in the economy, but is only one part of the larger picture affecting the availability of affordable housing.

Narrowly focused policy interventions may not only be ineffective, but may have unexpected negative impacts. Attempts to mitigate Airbnb’s effect on housing affordability have had limited success so far. Toronto’s short-term rental bylaw, which took effect in 2019, limits Airbnb stays in principal residences to a maximum of 180 days per year.

In fact, there is evidence that restricting Airbnb rentals reduces the development of new housing units, leading to less housing availability. These factors illustrate how addressing this complex issue will require creative policy measures.

Iman Sadeghi, PhD Candidate, DeGroote School of Business, McMaster University and Sourav Ray, Lang Chair and Professor of Marketing, University of Guelph

This article is republished from The Conversation under a Creative Commons license. Read the original article.