Airbnb’s Hidden Cost: Why Your Holiday Stay Raises Someone Else’s Rent

 “TOURIST GO HOME!”

This slogan can be widely seen on walls across cities such as Barcelona and New York (World Habitat, 2025). Behind it lies a growing frustration: while Airbnb easily provides cheaper stays and a more ‘local’ experience to foreign travellers, this comfort may push locals out of their own neighbourhood. So the question is no longer whether Airbnb is convenient – but who is paying for that convenience?

(Peter, 2017)

 

Why are tourists choosing Airbnb?

To understand the reason behind this phenomenon, we must start with a simple idea: preferences.

Nowadays, more and more travellers are moving away from traditional hotels in favour of experiencing local life. This allows them to immerse themselves in the neighbourhood, explore local cafes, and even cook at home. Airbnb, with a wide range of options, provides flexibility in letting people choose their “dreamed local home", like the number of bedrooms,  whether to have a kitchen or laundry facilities, and family-friendly equipment (Gibbs et al., 2018). More importantly, a friendly, more affordable price attracts many tourists who have few high-end travel options. This shift in consumer preferences is pushing travellers away from chains like Marriott or Hilton to local rentals. In Texas, each additional 10% increase in the size of the Airbnb market resulted in a 39% decrease in hotel room revenue (Zervas et al., 2017).

From a microeconomic perspective, these evolving preferences increase demand in the short-term rental market and drive up its profitability. Profit-seeking hosts will therefore change their properties from long-term tenants to Airbnb listings. From a report by Aline Cruvinel and Murray Cox (2026), in 92% of active countries, entire-home listings account for 82.4% of all listings, representing approximately 6.88 million housing units potentially removed from long-term residential use. This reallocation will reduce the supply of long-term leasing and contribute to a rising rent at a balance point in the market. Consequently, a traveller's seemingly simple decision can significantly impact the local housing market, affecting the availability of properties and the overall market conditions.

(Palomera, 2025)

 

No one pays for the hidden costs

However, the story doesn't end with changes in supply and demand.

The rise of Airbnb also brings a range of knock-on effects, the kind that don’t show up in prices but are still very real. Economists call these 'externalities', but in everyday terms, it just means that the choices of hosts and travellers end up affecting others without being reflected in the price.

A good place to see this is in the housing market. As more property owners realise they can earn higher returns through short-term rentals, many start moving away from long-term leasing, which leads to fewer homes available for the locals. With supply tightening, leasing fees begin to rise, and the trend is putting extra pressure on local tenants (Barron et al., 2021). Moreover, in many neighbourhoods, especially quiet residential ones, a steady flow of short-term guests can change the feel of the area. There may be more noise, more congestion, and less of a sense of community over time (Guttentag, 2015). These effects are challenging to measure, but they’re very real for the people who live there. While hosts and tourists benefit, locals may end up bearing the cost, both financially and otherwise.

From an economic perspective, this situation is a classic negative externality. The true cost to society, which economists call the marginal social cost (MSC), is higher than the cost faced by individual hosts (the marginal private cost, or MPC). That gap reflects things like reduced housing availability and the strain on residential areas. The absence of these costs in the price leads to a market with more short-term rentals than would be ideal for society (Figure 1).

Figure 1

 

That said, it wouldn’t be fair to paint Airbnb as entirely negative. There are upsides too. Visitors staying in local neighbourhoods often spend money at nearby cafés, restaurants, and small businesses, which boosts the local economy (Fang et al., 2016). These benefits ripple out beyond the host and guest, supporting communities in ways that aren’t directly reflected in rental prices. This is what economists would call a 'positive externality', where the wider benefits to society (marginal social benefit, MSB) are greater than the benefits captured by individuals (marginal private benefit, MPB).

All things considered, Airbnb is an excellent illustration of how real-world marketplaces are rarely flawless. Individual decisions may make sense on their own, but when you look more broadly, the final result may not necessarily be in everyone's best interests.

 

Can the government fix this?

When the market becomes uncontrollable, and a large number of housing properties shift from long-term to short-term rentals, the governments may step in to correct it. The objective of these policies is to reduce the hidden costs Airbnb makes without eliminating the benefits that the platform brings.

One effective policy is to impose a tax, such as a Pigouvian tax, on short-term rentals. This will shift external costs onto hosts and Airbnb users by increasing their costs (a process known as "internalisation" in economics), which will force some hosts to exit and enter the long-term leasing market to increase supply. Alternatively, governments can set annual caps on how many days a home can be rented out. The short-term rental activity is directly reduced by such quantity limits, which also contribute to an increase in the supply of long-term housing.

However, these policies come with trade-offs. Overly stringent regulations may lower income for hosts and leave them with limited options for travellers, reducing the efficiency of the market as a whole. Therefore, regulators need to strike a compromise between maintaining economic efficiency and correcting market failure

(Alegre, 2024)

 

 

Conclusion

The growth of Airbnb has revealed a clear conflict between private incentives and desirable social outcomes.

While it improves efficiency by matching supply to consumer demand, it simultaneously generates negative consequences by reducing long-term housing availability and snowballing rent prices. This highlights the case of market failure, where individually rational decisions lead to socially suboptimal outcomes.

Policy interventions, such as taxes or price limits, may help correct these distortions by internalising external costs, but they involve inevitable trade-offs for hosts and tourists. The key question, therefore, is not whether Airbnb is beneficial, but for whom and at what cost.

 

 

 

Reference list

1. Alegre, J. (2024). Barcelona Mayor Wants to Fix Housing Crisis by Banning Short-Term Tourist Rentals | The Deep Dive. [online] The Deep Dive. Available at: https://thedeepdive.ca/barcelona-mayor-wants-to-fix-housing-crisis-by-banning-short-term-tourist-rentals/ [Accessed 12 Apr. 2026].
2. Barron, K., Kung, E. and Proserpio, D. (2021) ‘The effect of home-sharing on house prices and rents: Evidence from Airbnb’, Marketing Science, 40(1), pp. 23–47.
3. Guttentag, D. (2015) ‘Airbnb: Disruptive innovation and the rise of an informal tourism accommodation sector’, Current Issues in Tourism, 18(12), pp. 1192–1217.
4. Fang, B., Ye, Q. and Law, R. (2016) ‘Effect of sharing economy on tourism industry employment’, Annals of Tourism Research, 57, pp. 264–267.
5. Gibbs, C., Guttentag, D., Gretzel, U., Morton, J., & Goodwill, A. (2018). Pricing in the sharing economy: a hedonic pricing model applied to Airbnb listings. Journal of Travel & Tourism Marketing, 35(1), 46–56.
6. Palomera, J. (2025). Barcelona and Madrid have very different ideas on tackling Spain’s housing crisis. Which will succeed? [online] The Guardian. Available at: https://www.theguardian.com/commentisfree/2025/dec/22/barcelona-madrid-different-ideas-tackling-spain-housing-crisis (Accessed 12 Apr. 2026).
7. Peter, L. (2017). ‘Tourists go home’: Leftists resist Spain’s influx. BBC News. [online] 5 Aug. Available at: https://www.bbc.co.uk/news/world-europe-40826257 (Accessed 12 Apr. 2026).
8. World Habitat (2025). The Airbnb Effect: short-term rentals with long-term consequences. Available at: https://world-habitat.org/blog/airbnb-and-the-housing-crisis/ (Accessed: 12 Apr. 2026).
9. Zervas, G., Proserpio, D. and Byers, J.W. (2017) ‘The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry’, Management Science, 63(4), pp. 1147–1162. doi: 10.1287/mnsc.2015.2380.