The effects of tourism on housing prices: applying a difference-in-differences methodology to the Portuguese market

• DOI: https://doi.org/10.1108/IJHMA-04-2021-0047
• Published date: 14 August 2021
• Date: 14 August 2021
• Pages: 762-779
• Subject Matter: Property management & built environment,Real estate & property,Housing markets
• Author: António Manuel Cunha,Júlio Lobão

The ef‌fects of tourism on housing

prices: applying a dif‌ference-in-

dif‌ferences methodology to the

Portuguese market

Ant

onio Manuel Cunha and Júlio Lobão

School of Economics and Management, University of Porto, Porto, Portugal

Abstract

Purpose –This paper aims to explore the effectsof a surge in tourism short-term rentals (STR) on housing

prices in municipalitieswithin Portugal’s two largest MetropolitanStatistical Areas.

Design/methodology/approach –This study applies the difference-in-differences (DiD) methodology

by using a feasible generalized least squares (FGLS) estimator in a seemingly unrelated regression (SUR)

equationmodel.

Findings –The results show that the liberalization of STR had a signif‌icant impacton housing prices in

municipalities where a higher percentage of housing was transferred to tourism. This transfer led to a

leftward shift in the housing supply and a consequent increase in housing prices. These price increases are

much higher than those found in previous studies on the same subject. The authors also found that

municipalitieswith more STR had low housing elasticities, which indicates that adjustmentsto the transfer of

real estate from housing to tourism were made by increasing house prices, and not by increasing supply

quantities.

Practical implications –The study suggests that an unforeseen consequence of allowing property

owners to transferthe use of real estate from housing to other services (namely, tourism) was extremehousing

price increasesdue to inelastic housing supply.

Originality/value –This is the f‌irst timethat the DiD methodology has been applied in realestate markets

using FGLS in a SUR equationmodel and the authors show that it produces more preciseestimates than the

baselineOLS FE. The authors also f‌ind evidence of a supply shock provokedby STR.

Keywords Elasticities, Housing, Tourism, Difference-in-differences, Real estate prices,

Short-term rentals

Paper type Research paper

1. Introduction

The importance of real estate prices extends beyond the role of f‌inancial supervisors, as it

directly affects the living conditions of the population. Real estate is an asset class with

several uses: either housing or services (off‌ices, shops, tourism facilities, etc.). Although

there is consensus that aggregate income is a real estate price determinant (Quigley, 1999)

and that tourism positively affects economic growth (Balaguer and Cantavella-Jord

a, 2002),

the debate about the direct impact of tourismon real estate prices remains open. While some

© Ant

onio Manuel Cunha and Júlio Lobão. Published by Emerald Publishing Limited. This article is

published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce,

distribute, translate and create derivative works of this article (for both commercial and non-

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IJHMA

15,4

762

Received25 April 2021

Revised30 May 2021

Accepted1 June 2021

InternationalJournal of Housing

Marketsand Analysis

Vol.15 No. 4, 2022

pp. 762-779

EmeraldPublishing Limited

1753-8270

DOI 10.1108/IJHMA-04-2021-0047

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1753-8270.htm

authors f‌ind that cities specializing in the tourismindustry often suffer from Dutch disease,

leading to an increase in real estate prices (Sheng, 2011), otherauthors have shown that, in

small coastal cities, tourismresults in a decrease in real estate prices (Biagi, 2016).There are

also new factors thataffect the relationship between both variables.

Starting in the late 2000s,what is known as the “sharing economy”meant that real estate

with housing permits began to be used for tourism, mainly through owner-occupiers

swapping houses for short periods. This new industry created new problems, in particular,

housing price increases (Jefferson-Jones, 2015) and a decrease in the supply of long-term

rental units (Barron et al.,2021). A study of the short-term rental activity in Berlin (Schäfer

and Braun, 2016) found that rental growth was higher in markets where the short-term

rental share was higher. In Portland, a study about relaxing building permit requirements

(Brotman, 2021) in 2014 found that the increased listing of properties on short-term rental

websites was not dependent on increased economic activity. In 2019, the city’s rental laws

were tightened to increase the availability of rental housing available to residents at

affordable prices. In several European cities such as Venice (Coldwell, 2017), Barcelona

(Diaz, 2017) and Amsterdam (Stone, 2018), local governments began to limit the short-term

rental of apartments for tourism.It is important to research the signif‌icance of the problems

arising from short-term rentals (STR)and housing prices and the causality between the two

variables. This will help politicians,the resident population and market players understand

the consequences of liberalizing the licensing of short-term rental establishments and

determine whether the remedies recently implemented are effective in addressing those

problems.

For instance, in Portugal, the European Union country with the highest percentage

increase in tourist arrivals (UNTWO, 2019) between 2010 and 2018 (a 234% increase), it is

likely that house prices maybe affected not only by economic and demographic factorsbut

also by each city’s tourism activity and the transfer of apartments and houses to tourism

activities. A Portuguese law of 2012 allowedhousing to be transferred to tourism activities

without requiring a change in the housing use permit of the real estate asset. Nevertheless,

the licensing of STR remained in the hands of the municipalities, which allowed some

discretionary political decisions. However, a law of August 2014 (Decree-Law 128/2014)

fully liberalized the sector making the licensing automatic. In the f‌irst half of 2019, 34% of

the houses sold in Lisbon, Portugal’s capital city, were purchased by foreigners from 70

different countries (Schiffmann, 2019). As there was no equivalent immigration of people

during the period and the registration of apartments and housesin local establishments for

tourism purposes (STR) was increasing exponentially, the logical conclusion was that

foreigners were buying residential apartments and converting them into tourism facilities.

Between 2018 and 2019, the two largest Portuguese municipalities (Lisbon and Porto)

reversed the liberalization and implemented containment measures by suspending new

tourism STR in certain zones of the cities. In 2020, the central government decided to

suspend the issuance of Golden Visas for foreigners purchasing real estate in Lisbon and

Porto Metropolitan Statistical Areas (MSA) (Tiago and Fernandes, 2020) to prevent real

estate prices in thesetwo MSA from rising even further.

Figure 1 shows that, since 2015, house prices in Portugal have increased at a faster pace

than the European Union average.

In this paper, we study the effects of political interventionon real estate prices in the two

largest Portuguese MSA: Lisbon (2.8 million residentpopulation and 18 municipalities) and

Porto (1.7 million residentpopulation and 17 municipalities). Both MSA belongs to the upper

decile of the European Union MSA (alsoknown as NUTS 3) in terms of population and both

are classif‌ied by the Globalization and World Cities Research Network as world cities

Ef‌fects of

tourism on

housing prices

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