Is Airbnb Really Ruining Rental Markets?

Is Airbnb Really Ruining Rental Markets?

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G. Brian Davis

G. Brian Davis is a landlord, personal finance expert, and financial independence retire early (FIRE) enthusiast, whose mission is to help everyday people create enough rental income to cover their living expenses.

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Those who benefit from the status quo hate disruptive technology.

Just look at the millions of dollars the taxi industry has spent lobbying for state and local governments to regulate—or outright ban—ride-sharing services like Uber. And, of course, the hotel industry has spent millions of dollars trying to do the same with vacation rental services like Airbnb.

It’s a strange and ironic case of corporate hotel lobbies invoking social justice arguments to sway politicians.

“Supply of rental housing is being eaten up by vacation rentals! No one can afford to rent anymore! Where’s the regulation?! Where’s the taxation?!”

Is there something to their arguments, these defenders of the status quo? How much has Airbnb impacted rental markets?

Regardless of their obvious self-interest, these hotel lobbying groups aren’t entirely wrong. But they’re far from right, too.

The Case Against Airbnb

Airbnb rentals are most prevalent in the most desirable neighborhoods, in the largest cities, where tourism is concentrated.

In other words, Airbnb has little impact in rural areas, in the vast tracts of suburban sprawl, or in low-income neighborhoods. It’s a phenomenon seen mostly in high-rent, high-demand urban neighborhoods.

Here’s the argument presented by hotel lobbyists and tenant activists: In urban neighborhoods with already high demand for housing, Airbnb rentals deplete the supply of housing for residents.

And they’re right, to an extent. HousingWire reviewed the New Orleans housing market a few years ago and found that if every home listed for rent on Airbnb were suddenly listed for long-term lease, long-term rental listings would spike by 30 percent. [1]

Put like that, it sounds shocking—except that number is misleading. Many people read that statistic as, “Oh my gosh, Airbnb housing is taking up 30 percent of available rental housing!”

But that’s not actually what it means.

It’s not referring to total rental housing; it’s referring to rental housing that’s vacant right now. If New Orleans has a vacancy rate of 4 percent, then they’re talking about all Airbnb rentals being able to add another 30 percent to that 4 percent (or about 1.2 percent of total rental housing).

Is it real? Yes. Is it an overwhelming economic force? No.

Related: My Client Tripled His Income Using Airbnb: Here’s What He Should Know About Taxes

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The Rise of the Sharing Economy

In a very real sense, the sharing economy has helped democratize industries once dominated by corporations and unions. Average Joe can now participate in the hospitality industry, courtesy of Airbnb. And corporate hotel chains don’t like it.

This democratization is not just a pleasant concept. In a survey of Airbnb hosts, nearly one in five reported that the revenue they earned by hosting guests has helped them avoid eviction or foreclosure. [2] That’s 16,000 Americans who kept their homes in the top 10 U.S. cities alone.

That doesn’t mean that the business community feels quite so warm and fuzzy about the sharing economy. Anyone looking to sell something has cause for concern when consumers start sharing those somethings, rather than everyone going out and buying their own something.

Here’s how mortgage industry analyst Rob Chrisman puts it: “If everyone on the street doesn’t need to buy or own their own shovel or their own car, and the world needs to make fewer of them over time, what does that do to manufacturing-related GDP as the years pass?”

The most obvious rebuttal to that argument is that the U.S. economy has not been driven by manufacturing for decades. Most manufactured goods are imported, so if American consumers bought less of them, perhaps we could shrink our trade deficit with rival economies like China.

Manufacturing may no longer be the backbone of the U.S. economy, but consumption is another story. Still, the sharing economy boasts plenty of other benefits: less waste for landfills, less spending for consumers, less of consumers’ paychecks becoming corporate profits, and more going to mom-and-pop providers.

How Some Cities Have Tried to Legislate Away the Sharing Economy

Some cities really, really don’t like Airbnb.

There are some legitimate concerns about housing supply, outlined above. Then there’s the hotel lobby, which has spent a massive amount of money to bend legislation their way.

But what cities hate most about Airbnb is the loss of tax revenue.

New York City outlawed most short-term rentals on Airbnb. In the higher-demand areas of New Orleans, such as the French Quarter, the city has also banned most short-term rentals.

Santa Monica has gone full-regulation on Airbnb hosts, requiring business licenses, making hosts to stay on-site with renters, and imposing a hefty 14 percent tax on rentals. What few Airbnb rentals are allowed in New York are also subject to heavy taxes.

They might have paused to consider some other solutions.

Market Solutions: Supply Side

There’s an old proverb that applies nicely to disruptive technology and the sharing economy: “When the wind changes, there are two types of people: those who build walls and those who build windmills.”

Regulation-happy governments have reacted by building walls, trying to resist technological and economic change by regulating it away. But what if we instead tried a market-based approach, by streamlining regulatory changes instead of piling them up?

The hotel industry has been disrupted by the sharing economy. Imagine that 15 percent of hotels go under and the other 85 percent evolve and survive. The 15 percent of hotels that go under represent valuable real estate that could be converted to residential use—if city governments are nimble enough to rezone them without years of red tape.

Likewise with the “retail apocalypse.” We have acre after acre of retail space falling fallow in prime locations that could be rezoned to residential use—in these cities where local governments worry so loudly about housing supply.

Cities could also approve more housing permits if they’re so concerned. San Francisco’s city government has been whining for years about how high rents are, how there’s no affordable housing, etc. But look no further than their new housing approval process. New development must be approved by neighborhood councils (cue the not-in-my-backyard moaning), approved by the city planning commission and then ratified by a board of supervisors. If a housing construction project survives all that, it’s subject to an appeals process.

Compare San Francisco’s new housing numbers to Seattle, which has a more streamlined approval process. San Francisco saw 15,730 new housing units added from 2010-2016 [3], compared to more than double that in Seattle (32,000). Since 2000, San Francisco saw 38,000 new homes built, compared to 70,000 in Seattle.

This is doubly impressive, considering Seattle only has a population of 700,000 compared to the 900,000 in San Francisco!

Related: How to Use Airbnb to Travel & Live for Free in Retirement

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Market Solutions: Demand Side

Guess what? When rents get too high in one neighborhood, people start moving to another neighborhood. Consider Brooklyn’s rise in popularity in the 2000s, after Manhattan grew too expensive in the late ‘90s.

Regulators like the idea of instant results and keeping firm control over those results. They dismiss market economic forces as “theory,” yet it’s already happening. Demand has already started shifting away from these very neighborhoods.

Young adults have been moving to less expensive cities. Since 2010, second-tier cities have actually seen much higher population growth among millennials [4], relative to their populations. Consider these top eight cities for growth among young adults: Virginia Beach, Richmond, Riverside/San Bernardino, Memphis, New Orleans, Austin, Pittsburgh, Baltimore—not expensive cities like New York City, Los Angeles, Chicago, San Francisco, Seattle, Washington, D.C., Houston, Dallas, etc.

And many are abandoning these expensive, high-demand urban neighborhoods entirely. New studies by Zillow and Harvard have found that most Millennials plan to move to more affordable suburbs [5], if they haven’t already done so. In fact, nearly half of millennial homeowners already live in the suburbs, compared to only 33 percent living in urban neighborhoods.

Airbnb, Rental Markets, & Commercial Operators

Technology changes. Economies change. And that change and disruption are happening faster than ever in today’s world.

That means governments and regulators will need to become faster, too—more agile, more efficient—if they’re to actually serve their constituents as they claim. If our bureaucrats keep moving at 20th century paces, we’ll continue to see empty malls sitting next to neighborhoods with no affordable housing.

Here’s a quick example of how city governments could have approached Airbnb if they’d been less keen to toe the hotel industry’s line and less greedy for tax revenues.

Individual property owners renting out rooms or renting out their homes short-term rather than long-term are hardly villains. If there is a problem, it lies in the rise of commercial operators. These are businesses buying up homes in the highest-demand cities and operating them as Airbnb rentals.

Take Vancouver, for example. Over a third of the city’s Airbnb home listings are owned by a small handful of owners. [6]

That suggests a new form of the hospitality industry, rather than participants in the sharing economy. If cities are so eager to regulate and tax, perhaps they should have started with these commercial operators, rather than banning homeowners from filling their extra bedrooms as they see fit.

Still, there are plenty of market solutions to these rental housing concerns if regulators could become agile enough to keep pace with today’s world. Instead, we’re seeing last-century bureaucracies trying to address 21st century problems.

Get used to disruptive technology, because it will only come faster and faster. You can build walls or you can build windmills. Which would you rather be known for?

Resources

[1] https://www.housingwire.com/blogs/1-rewired/post/38125-heres-proof-airbnb-is-destroying-the-new-orleans-housing-market

[2] http://www.businessinsider.com/statistics-data-airbnb-rent-prices-2016-10

[3] https://www.bizjournals.com/sanfrancisco/news/2017/04/28/san-francisco-seattle-housing-production-pipelines.html

[4] http://time.com/4797956/cities-millennials-moving/

[5] http://www.latimes.com/business/la-fi-millennial-homes-20170303-story.html

[6] http://www.theglobeandmail.com/real-estate/is-airbnb-inflating-the-vancouver-housing-crisis/article25156301/

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What do you think about the rise of Airbnb and the sharing economy in general? Do property owners have a right to lease them for as long (or short) as they like?

Comment below!