The Airbnb Dilemma: Regulate or Not?

Revenue growth in the rental of dwellings in Virginia through Airbnb has outstripped the rental of single rooms. Source: “2017 State of the Commonwealth Report”

Airbnb, the website that allows homeowners to rent rooms and houses for short periods, no longer occupies an obscure niche in the Virginia lodging marketplace. The company is capturing a disproportionate share of growth in lodging industry rooms and revenues, and it depresses the ability of hotels to raise rates during periods of peak demand, concludes the “2017 State of the Commonwealth Report.”

The number of Virginia listings has surged from just over 2,000 in October 2014 to 10,400 in October 2017. Total revenue has increased over the same period from $1.52 million to $17.4 million. Airbnb share of the lodging market rose from less than a half percent to nearly 4.7%.

“While the Airbnb rental sector may be smaller than the traditional lodging sector, Airbnb is a rising competitor,” write Robert M. McNabb and James V. Koch, the lead authors of the report.

The image most people have of Airbnb participants is of homeowners renting out a spare room for pin money. But the data suggest that it’s becoming an increasingly big business in which property owners are renting entire dwellings. While private room revenues increased sixfold over the three-year period studied, the rental of entire places increased thirteenfold, as seen in the chart above.

That reality has implications for how Airbnb should be regulated. Whole-house oceanfront rentals in Virginia Beach have generated numerous complaints regarding unruly behavior, illegal parking, and trash. The lodging industry has argued that Airbnb rentals should be taxed on the same basis and should meet the same regulatory standards as hotels and motels are.

McNabb and Koch are sympathetic to Airbnb to a degree.

It is not the job of government to protect existing firms and industries from new, more efficient or more attractive competitors that would serve consumers better and do so at lower prices. … Enabling citizen consumers to spend their dollars where they wish is a welfare-maximizing stance for government to adopt. … As a rule, challenging competing firms to meet “the market test” — that is offer goods and services at prices and levels of quality that are attractive consumers… — not only is an equitable approach that treats all citizens and firms the same, but also generates the best overall results for the citizenry.

However, they add an important caveat: Government should not intervene as long as the use of Airbnb “does not generate undesirable side effects such as pollution, noise, traffic congestion, crime, unsanitary conditions that impact the public health, and the like.”

While some Airbnb hosts have consciously evaded city regulations and taxes, it does not necessarily follow that localities should devote substantial resources to cracking down on them. Single-room hosts account for a small percentage of rooms, revenues and taxes, and they are rarely the source of behavioral problems. They go in and out of the market, and they’re difficult to identify and force to comply. The payoff for local governments is low.

Cities would do better to devote scarce enforcement sources going after Airbnb hosts offering their entire place for rent. “Plainly speaking, this is where the revenue is and evidence suggests that any behavioral problems that Airbnb generates are concentrated among these properties as well.”

Meanwhile, the authors advise hotels operators to re-evaluate their pricing and quality strategies. “Airbnb and similar rental hosting firms are not going to go away.”

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3 responses to “The Airbnb Dilemma: Regulate or Not?

  1. This debate is currently raging in the District of Columbia, where this morning’s paper talks about its gentrification” [read: racial] implications. https://www.washingtonpost.com/local/dc-news/airbnb-becomes-flash-point-in-the-districts-hot-debate-over-gentrification/2017/11/21/3c3bcdb2-bf19-11e7-8444-a0d4f04b89eb_story.html?utm_term=.5cb31b8633bf

    Gentrification in DC means blacks getting pushed out of neighborhoods they once dominated — or as the WP put it, “At the core of the controversy are the same questions that grip the District over how redevelopment is transforming neighborhoods, raising housing costs, adding to congestion, and altering the city’s economic and racial demographics.” And there’s the fear of the outsider. As one person told the Washington Post, “You see all sorts of strange people coming and going [at Airbnbs], somebody may want to rent a room who is a psycho killer.”

    I remember as a child visiting relatives in Lynchburg. Right there in their residential neighborhood there was a house with a lighted sign in front saying “Rooms” and I asked what that meant at the table one evening. The discussion was, I recall, animated and opinionated. Such behavior as renting rooms to strangers “should have gone away with the Depression” and would have, I learned, but for Mrs. Jones’ practice being ‘grandfathered’ [more questions] as ‘riff-raff moving in meant the neighborhood was in trouble’ [more questions]. Seems like a neighborhood on the rise can be just as problematic as one in decline.

  2. As it stands today, short-term rentals are illegal in Fairfax County. The staff is looking at options and just released a straw man for comment.

    I don’t think this should be illegal, but regulated. It needs regulation because this is a commercial use in a residential neighborhood. A number of organizations and individuals have proposed a 30-day annual limit, with a requirement that the owner remain on premises or have an agent present. All taxes should be paid and occupancy and parking limits enforced. On the whole, Fairfax County does a poor job of enforcing its occupancy laws.

  3. Comment posted on behalf of Ken Cuccinelli:

    I just read the Air BnB article: to reg or not to reg?

    And it brought back to me the situation wherein McAuliffe and Herring dragged Uber and Lyft into a ‘settlement’ of sorts over the same question, vis-a-vis taxi/car services.

    I said then, and I will say now, something not even mentioned in the article. The very raising of such a question first demands asking and answering a preliminary question, namely, what elements of the existing regulatory scheme has our experience of the last 100 years demonstrated to us ought to be jettisoned? That of course has subparts, like asking are we just so addicted to the tax revenue (e.g., lodging taxes) that we can’t think outside of the box anymore? And others.

    But I would suggest using the topic as a springboard to the preliminary question (and, btw, one legislators/policy-makers should be asking), rather than asking the question on its own.

    Why do we need government regulation of these outfits anymore? Seriously. Fire inspections I get for hotels, but what’s the point of the taxi commission? Why not just put in place one reg that requires the posting (and agreement) to pricing before you get a ride (e.g., for Uber they tell you the price, for taxis they tell you the rate/mile, both fine). What else do we need? Let’s just push for transparency in pricing and the market will do the rest.

    Associations will arise, e.g., the Virginia Taxi Association, and to be a member you must have a clean criminal record and no insane driving violations… etc.

    Tech driven advancements that disrupt old markets should be a wake-up call to policy makers to revisit their (yes, “their”) regulatory (market barriers for special interests) schemes to reduce the role of government and special interests in exchange for transparency on the part of market participants.

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