Airbnb has taken its fair share of criticism over the past three years. Record-high inflation and the rising cost of housing has caused the short-term rental giant to come under close scrutiny from government officials and regulators.
But the scrutiny may be well-deserved. Regulators argue that the business model of Airbnb and its competitors weakens the already diminished housing supply. They say that Airbnb incentivizes homeowners to rent out their living spaces at over-inflated prices instead of renting to long-term tenants or selling their properties to aspiring homeowners.
Although Airbnb’s struggles may continue for the foreseeable future, the short-term rental website is still the largest player in the industry and will likely persevere through these momentary struggles.
Keep reading to learn more about Airbnb, short-term rental regulations, and the supply issues that affect consumers today.
The Airbnb Business Model
Before we talk about the regulatory action surrounding Airbnb, it’s important to first understand how the business model works and why they are being targeted by regulators.
Airbnb is a peer-to-peer marketplace, meaning it needs two parties on the platform to function efficiently. The first party on Airbnb are the hosts, who own the rental properties and provide details about their accommodations to potential guests online.
Hosts on Airbnb also determine the rental terms for their property, including the pricing, minimum stay requirements, and guest screening processes.
Unsurprisingly, the second party on Airbnb are the guests, who are the ones that book the rental properties for a short period of time from the hosts on Airbnb.
Guests find properties on the Airbnb website using filters that let them sort listings based on location, price range, property type, and amenities.
The Airbnb platform has gone under extensive cosmetic changes since it was first launched in 2008.
Today, Airbnb’s website and mobile application facilitates the entire booking process for guests. They handle payment processing, security deposits, and have customer service representatives to handle any disputes.
Airbnb’s main revenue source is through the fees charged to both hosts and guests that use the platform. Hosts pay 3% to 5% of the total booking amount as a service fee, while guests pay service fees ranging from 6% to 14% of the total booking cost.
To a lesser extent, Airbnb makes additional revenue from Airbnb Plus premium listings and guided tours and activities offered through the platform.
Attempts to Resolve the Affordability Crisis
While Airbnb may have a role in the affordability crisis, they are certainly not the only ones to blame. But that’s not stopping regulators in New York City.
In an article published in September, NBC reports that the city of New York will be enforcing the most stringent regulations on short-term rental sites in history in an effort to decrease the cost of housing and make it possible for average Americans to rent properties on a long-term basis.
New York City Local Law 18 is the official name for the regulation. Unsurprisingly, Airbnb and its supporters were in opposition to the regulation and argued that they would limit accommodation options for visitors to the city.
Among the most important provisions in Local Law 18 is that only a maximum of two guests could stay in an Airbnb unit in New York City each night, and with the requirement that hosts be physically present during the rental period.
Additionally, doors between host and guest areas have to remain unlocked so all occupants have access to the entire unit. These measures were primarily targeted at investors who had converted long-term residences into more lucrative Airbnb listings.
According to data provided by Inside Airbnb, there were nearly 22,000 listings on Airbnb offering entire units. These listings are now prohibited under Local Law 18 and will eliminate the de facto hotels that have been popping up all across the city.
This will, hopefully, start to ease the strain of the New York City housing market and start the process of making housing more affordable for those who need it most.
Rental Properties and Supply Challenges
Rental property websites like Airbnb can contribute to housing supply issues in a variety of ways.
First, many property owners are starting to realize that listing their properties on platforms like Airbnb can be more lucrative as opposed to traditional long-term rentals. As a result, there will be a reduction in the number of long-term rental units and will make it more challenging for those looking for stable housing.
Additionally, the limited housing supply often leads to more competition among renters. Airbnb attracts a large number of tourists and travelers in many areas and increases the demand for temporary housing. When the demand for housing increases, the competition will further drive up prices in the market.
Short-term rental properties also charge higher nightly rates compared to long-term rentals. When property owners realize they can make more money through short-term rentals, it can incentivize them to remove properties from the long-term rental market and make housing unaffordable for many residents.
How Supply Issues Affect Consumers
Aside from an increase in housing prices, inventory supply issues have other negative effects that are especially detrimental to aspiring homeowners and long-term renters.
Limited Housing Choices
Fewer properties on the market means consumers will have fewer options to choose from and may have to compromise on key factors and selling points, such as the location, size, or overall condition of the property.
Bidding Wars on Available Properties
In tight housing markets, multiple buyers often compete for the same property and ignite bidding wars.
While a bidding war directly benefits sellers, it can be frustrating and financially challenging for buyers who may need to make offers above the asking price to secure a home.
Commuting and Transportation Issues
Even in the age of remote work, many families and aspiring homeowners want to live near their workplace or in proximity of amenities like shopping malls, grocery stores, or dining districts.
A shortage of homes on the market may force consumers to live further away from these amenities, resulting in longer commutes and reduced quality of life when factoring in the extra cost of transportation.
Homeownership was a dream that was attainable for many Americans in recent decades. But now, plagued by student loan debt and record-high inflation, young Americans are finding that it’s nearly impossible to enter the housing market on an average salary right out of school.
This issue is starting to delay homeownership for many young Americans who otherwise would be thrilled to become homeowners and contribute to the housing market.
Short-Term Rental Regulations
Although Airbnb is perhaps the most prominent rental listing site, there have been regulations enforced on businesses in this industry for decades, such as:
- Zoning and Land Regulations: Many cities have zoning laws that dictate how properties can be used. In some areas, short-term rentals may not be permitted in residential zones or may require specific permits. Some cities differentiate between owner-occupied properties (where the host lives on-site) and non-owner-occupied properties (entire homes or apartments rented out by absentee hosts) and may have different regulations for each.
- Licensing and Permits: Some local governments require hosts to obtain licenses or permits to operate short-term rentals. These permits may come with specific requirements, such as safety inspections or insurance coverage.
- Taxation: Taxation is a major issue for short-term rental businesses. Many rental markets require hosts to collect occupancy taxes and submit them to the local government. Airbnb has worked with local authorities in the past to implement a system for collecting and remitting taxes on behalf of hosts.
- Safety and Building Codes: Regulations related to safety and building codes are a major concern for rental listing sites like Airbnb. Hosts may be required to meet specific safety standards, provide fire extinguishers, smoke detectors, and adhere to occupancy limits.
- Fair Housing Laws: Short-term rental platforms have faced criticism over alleged discrimination by hosts. Many local governments have implemented anti-discrimination regulations that prohibit hosts from refusing bookings based on race, religion, or gender.
While the short-term rental market has exploded in recent years, there’s an effort to implement regulations to curtail some of the perceived damage that companies like Airbnb have inflicted.
Although Airbnb’s business model relies on hosts renting out their properties to short-term tenants, the government has the right to intervene when their business practices have a negative effect on the housing market.
Whether it’s housing prices, bidding wars, delayed homeownership, or commuting issues, the effects of supply shortages on the housing market can be devastating. Owning a home is now considered impossible in many areas of the country, and regulating Airbnb may prove to be an effective way to turn things around.
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