July 4 Won’t Mean Independence for Airbnb Customers

Next weekend families will be travelling across America to celebrate Independence Day, and they will need housing when they arrive at their destination. Until seven years ago, travelers stayed at hotels, traditional rentals, or with family and friends. But now the “sharing economy” has given them a new option--Airbnb.

But for those traveling the country this summer, lodging with Airbnb may not be an option. Government regulators, no fans of independence even on the July 4th weekend, are cracking down on Airbnb just as they have with Uber and other “shared” services. 

Airbnb allows owners to rent out their apartments, homes, or even individual rooms on both a short-term and long-term basis. It is the tech industry’s answer to the hotel industry and, like other successful startups, its growth has been rapid. On June 26, Airbnb was valued at $25.5 billion, making it slightly smaller than Hilton Hotels and Resorts, the world’s largest lodging company. 

Santa Monica’s regulations on Airbnb are some of the most restrictive in the country. As of June 15, renting out a home for fewer than 30 days will be illegal unless the owner is staying on the property.

The decision to regulate Airbnb will harm the city’s economy. A large portion of Santa Monica’s income comes from the tourism industry, yet the city is substantially reducing its supply of rentals. As a result of new regulations, 70 percent of the Airbnb listings are now illegal. Effectively banning Airbnb will drive up prices and encourage visitors to go elsewhere. 

Santa Monica’s regulation also prevents its residents from earning supplemental income. While homes are expensive investments, they are generally worth the cost because they appreciate, and provide their owners with shelter and happiness. However, when owners are away, Airbnb not only allows owners to generate extra income using assets they already own, but also reduces deadweight loss in the economy by ensuring that homes are always in use.

Despite the economic cost of regulating Airbnb, governments across the country are moving ahead with plans to restrict use of the service. Most of the arguments for regulation are weak or self-interested. 

Santa Monica claims that it enacted its regulation to maintain a sense of community. The city worried that vacationers were driving out residents. However, Santa Monica misdiagnosed the problem. Residents are leaving not because of Airbnb, but because of the constantly rising cost of living in the area. If the city really wants to help its residents stay in Santa Monica, it would allow them to supplement their income using Airbnb. 

Many supporters of Santa Monica’s regulations also complained that Airbnb brought rowdy vacationers into their quiet neighborhood. Nicole Gelinas describes the problem well, “People tend to act differently when on vacation — drinking more and partying later, carrying more cash. Out-of-towners also accept help from the wrong person more often. Bottom line: They’re more likely to be crime victims or perpetrators.” 

Gelinas is only partially correct. While there are a few bad apples, the vast majority of Airbnb users are relatively respectful. When they become obnoxious, Airbnb has offered to help deal with them. Poorly reviewed guests are often banned from using the service and Airbnb occasionally offers financial compensation for negative experiences. Rambunctious visitors are a problem that should be dealt with using a regulatory scalpel rather than a sledgehammer. 

Elsewhere, the rationale for regulation is not as well meaning. Throughout the country, the hotel industry has aggressively used regulation to prevent the growth of Airbnb. In New York, it hired lobbyists to persuade the legislature to crack down on Airbnb. So far these schemes have been successful. New York City now tries to strictly enforce regulations that prevent Airbnb from operating. According to New York’s attorney general, 72 percent of Airbnb’s New York listings are illegal. Often the fines for disregarding these unfair regulations are harsh. Nigel Warren, a resident in East Village, was fined $40,000 for renting out his apartment through Airbnb. 

In New York, the obsession with regulating Airbnb is reaching the point of absurdity. In April a New York assembly member went undercover to expose what she believes to be a “pervasive” illegal hotel problem. Excessive regulation is even beginning to create collateral damage. Anti-Airbnb rules have forced nearly half of New York City’s bed and breakfast establishments to close because they are no longer legal.

But the hotel lobby’s success in New York City would not be so successful if the city did not have its own reason for attacking Airbnb. For years the city government attempted to keep housing prices affordable in Manhattan using rent control. This policy is a disaster, but few lawmakers want to admit their failure. 

Landlords are using Airbnb to get around rent control. Airbnb allows owners to rent their apartments at fair market value instead of an unreasonably low price. Lawmakers are, of course, outraged. But, by disregarding the law, landlords are improving New York City’s economy and rectifying distortions in the housing market. Instead of recognizing the failure of rent control to provide affordable housing, the city government accused Airbnb of driving up housing prices. Mayor de Blasio must recognize that regulating Airbnb cannot solve his affordable housing crisis. It can only be fixed by ending rent control.

With that said, some regulation of Airbnb is justified. Localities are well within their right to collect tax money from Airbnb so long as they do so non-intrusively and fairly. But responsible regulation is sadly less common than it should be. Even San Francisco, Airbnb’s home, is waging a long war with the company. 

Although Airbnb has struggled with obstructive governments, cities like Chicago and Washington D.C. can serve as models for how to deal with Airbnb. These governments worked together with Airbnb to create stable regulatory environments that ensure Airbnb will not come into constant conflict with the law. 

Airbnb, and the rest of the “sharing economy,” can benefit travelers and communities across the country—if government gets out of its way. As Americans set off on their July Fourth getaways, they need more options rather than fewer.

Patrick Holland is a contributor for Economics21. Follow Patrick on Twitter here.

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