Airbnb faces trouble at home
Airbnb’s fate in San Francisco may soon be up for a vote. While the village that raised the 7-year-old company is not yet ready to abolish it completely, many citizens are hoping to use a ballot initiative this November to curb its reach significantly.
A petition with 15,983 supporters calling for further restrictions on short-term rentals has been dropped off at San Francisco City Hall. If the city can confirm at least 9,700 of the signatures are authentic, a vote will be held Nov. 3. Before analyzing the new petition, let’s look at the current situation:
What is home sharing? Home sharing allows property owners to provide short-term rentals to vacationers, travelers and business people in much the same way hotels provide lodging. The experience is often a unique one, in which guests get to see a part of town they otherwise would not, visit restaurants off the beaten path and often get free Wi-Fi, laundry and breakfast. Platforms like Airbnb, HomeAway and VRBO help match those looking to rent space with property owners who have space to rent. Airbnb is unique in that it always collects payment, provides insurance and remits taxes on behalf of owners in certain cities. Investors value the company at more than $25 billion.
Short-term rentals are often categorized into two different groups: owner-occupied and non-owner-occupied. The former describes an owner who is present for the duration of the guest’s stay, with space offered to the guest typically in a spare bedroom, on the couch or sometimes on the floor. A hallmark of the sharing economy, this type of rental allows property occupants to leverage unused space in order to make a little extra cash. In non-owner-occupied rentals, keys are turned over to the tenant for a set number of days, after which a new tenant is likely to occupy the property. The distinction is important. Across the country, non-owner-occupied rentals are usually met with more resistance. Concern over non-owner-occupied rentals also can lead to unwarranted legislation against owner-occupied rentals.
What are the current regulations? Last October, San Francisco passed an ordinance, dubbed the “Airbnb law,” making short-term rentals legal for the first time. The law required operators to register with the city—paying both a $90 business license fee and a $50 rental registration fee—before opening their doors to guests. The law also requires owners to pay the same taxes hotels and motels do. Airbnb has agreed to collect and remit these taxes and paid $25 million in back taxes this February
Perhaps most contentiously, the ordinance capped the period that non-owner-occupied spaces may be rented at 90 days annually. Essentially, this rule is supposed to make it impossible for homeowners to profitably rent out a non-owner-occupied home. That is, if you live in New York but own a vacation home in San Francisco, you would not be able to cover your mortgage payment only renting out just 90 days. However, it does allow someone going on vacation for a couple of weeks a year to rent out their home while they are away.
What changes have lawmakers proposed? Even though the ordinance only went in effect Feb. 1, lawmakers already have both proposed and made changes. Just last week, Mayor Ed Lee announced creation of the Office of Short Term Rental Administration and Enforcement to help enforce the new laws. The six-person team will seek to increase legal compliance because, according to the city, less than 15 percent of rental properties in San Francisco operate legally. Additional changes, like making business licenses available online and allowing owners to register without an appointment, aim to boost registration.
Lee and Supervisor Mark Farrell also have proposed capping all rental properties, including owner-occupied ones, at 120 days per year. Other council members propose a cap of 60 days per year, a proposal the council was supposed to hear later this month. However, if the ballot initiative is a go, it is likely the council will likely not weigh in on the matter until after November.
What does the petition say? Written by a coalition called ShareBetterSF, the petition aims to limit the number of days any property can be rented short-term to 75 days, regardless of whether or not it is owner-occupied. It also requires owners to notify their neighbors when a guest will be in town, mandates that platforms not list unregistered properties and demands quarterly reports from property owners.
Advocates for the sharing economy in San Francisco contend these new regulations infringe their rights, hurt the middle class and give preference to incumbent industry players, most notably hotels. They are not wrong.
Why should a local government be able to tell a property owner how he or may or may not use his or her own property? Private contracts between homeowner associations, landlords and neighbors can limit short-term rentals without government intervention. The middle class in San Francisco, which is fighting hikes in rental costs, use Airbnb to rent out spare rooms and couches to pay the bills. In fact, two of Airbnb’s three founders (Joe and Brian) started the company because they could not pay their rent. Guess where? In San Francisco!
Finally, these new platforms help keep hotel costs in check, even where their rates are rising. Studies have shown that, as Airbnb has become more popular, hotel rate increases have leveled off. This is a good sign. Despite the entrance of home-sharing platforms, hotels are doing better than they ever have. In San Francisco, average prices for a night’s stay increased 10.9 percent in 2014 and occupancy rates hit a record 84.1 percent.
Opponents of home-sharing argue that residential units have been taken off the market by landlords, who now seek to rent to travelers instead of long-time city dwellers. They, also, are not wrong. Some landlords have evicted tenants and instead turned to renting out their properties short-term. When these homes are taken off the normal rental market, prices do go up. In response, the city has contacted 15 hosts who are operating multiple homes illegally. By targeting non-owner-occupied properties, the city hopes to protect residents.
But what Airbnb naysayers often fail to acknowledge is just how few homeowners are using these new platforms. Estimates range, but at most, short-term rentals make up less than 5 percent of the housing stock; Airbnb lists about 10,000 properties in a city with 379,579 residential units. When you consider that some properties are likely cross-listed on multiple sites and that many rentals are owner-occupied, the impact is further diminished. In San Francisco, critics also fail to mention that costs were skyrocketing well before Airbnb was born. Consider this graph, with data from 1994 to 2009, from Liberty Hill Development LLC:
The growth of the Silicon Valley has increased salaries for almost everyone in the technology industry. This is not a bad thing! But what it means is that newcomers to the city are simply able to pay more for rent than current residents. It is the large increase in demand for housing caused by the booming tech industry—not a small decrease in the supply of housing caused by the rise of Airbnb—forcing the city’s rental rates up. In fact, allowing short-term rentals in the city makes building housing more profitable, and in the long-run, should lead to increased construction. This graph, comparing population and housing growth over the 15 years before Airbnb, proves our point:
In addition, even if a small amount of short-term rentals pressure rental rates higher, rent controls likely play a much larger role. Only slightly more than 10 percent of the city’s housing stock is available to rent through anything like an open market. According to TechCrunch, about 50 percent of homes in San Francisco are rent-controlled and another third are owner-occupied. We have already explained some of the perverse impacts of rent control, including: less quality housing, more government spending, more inequality, black markets and shockingly, less housing.
So, the problem is not with existing housing. The problem is that new housing is not being built at the rate the city needs it. The reason is that San Francisco has incredibly strict zoning laws, lengthy application and wait times and tough rent-control legislation.
It’s easy for local politicians to point their fingers at brave entrepreneurs that no one denies are disrupting the market. What would be braver still, and more beneficial to their citizens, would be to acknowledge all the areas where government intervention already has fallen short in the San Francisco housing market.
