Is staycation inflation here for good?

British holidaymakers thwarted by changing overseas travel restrictions are turning to “staycations”. But UK holiday cottages which once cost a few hundred pounds to rent now cost a few thousand. What does this say about the state of the UK holiday sector? And what are the post-pandemic implications?

A dynamic market

The holiday accommodation market comprises several - quite distinct - markets. During the COVID-19 pandemic, for example, the accommodation market in central London has been quite different to the markets in some areas like Cornwall. The absence of overseas visitors has dampened the former, while staycationing Brits have fuelled the latter. Unlike aircraft which can be redeployed where demand is strong, holiday accommodation is fixed. Yet price changes should, in principle, send out signals to adjust capacity. Is this happening?

Problems of supply

In some easy-to-create accommodation sectors, capacity has grown. The campsite booking platform Pitchup has reported over 200 new campsites appearing so far this year. But for self-catering accommodation, market forces have become increasingly nuanced, as new accommodation cannot be easily created from scratch. The challenge is to transfer accommodation between alternative uses.

For many accommodation booking services, the biggest marketing challenge has been to encourage new supply. In May 2021, Airbnb reported four million active hosts, but this number had been flat over the previous six months. Not surprisingly, its rental prices have been rising according to company filings, up by 35% worldwide compared to the same time one year ago, to $160 per night.

Another challenge to supply is that holiday rentals compete with demand from remote workers. Like staycationers, instead of renting in a town, remote workers look for picturesque places to live and work. Unsurprisingly, the number of stays 28 days or more had increased to 24% of all stays worldwide on Airbnb in the first quarter of this year, compared with 14% in 2019. The problem of supply has also been exacerbated by second homeowners temporarily using their second home as their main home, rather than renting to holidaymakers.

Escape to the country

During the pandemic, the pattern of bookings has also changed. The research agency AirDNA reported recently that the number of nights booked in rural areas for this summer is nearly 50% higher than at the same point in 2019, while reservations in urban centres were down 65%. Airbnb has reported more searches so far in 2021 for accommodation in Cornwall, and less for London. So, in the current market conditions, advertising has focused on finding new properties to rent to serve a long list of potential renters in specific markets.

Algorithms in pricing

In this dynamic market, landlords still face a dilemma of knowing how to pitch their prices. Larger rental platforms offer landlords algorithm-based tools for setting prices. Yet algorithms only work effectively where there is a lot of previous years’ data covering demand conditions and price variations, but they struggle when demand conditions go outside previous ranges. The current uncertainty of international tourism changes the dynamics of the domestic holiday accommodation market beyond what algorithms were designed to handle. Algorithms based on speed of market change may actually be programmed to generate headline grabbing prices. At other times, it could be landlords pushing their luck.

Restrictions on short-term holiday lets

In the UK, there is still short-term flexibility to bring on new supply. However this flexibility is diminishing in cities and countries which have restrictions on short-term holiday lets. There is a strong view that holiday accommodation is too important to be left to price signals, flexibility and market forces, and pricing local people out of affordable housing raises broader issues about community cohesion. But even from a narrow markets perspective, repurposing accommodation to short-term holiday rentals in an area may force out the bar workers, cooks and cleaners essential to tourism experiences.

Holiday cottages for £7,000 per week may attract headlines, and to some will be evidence of market forces working as they should. But as we emerge from COVID-19, the consequences of a free-for-all market in holiday accommodation may be another area for public policy resetting as a new normal emerges.