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The Airbnb Dilemma: Weighing the Costs and Benefits of Regulating the Vacation Rental Industry

Published onNov 12, 2022
The Airbnb Dilemma: Weighing the Costs and Benefits of Regulating the Vacation Rental Industry

Over the past few years, short-term vacation rental sites like Airbnb and Vrbo have dramatically changed the hospitality industry, quickly outpacing some of the world’s most popular hotel chains. These sites allow travelers to veer away from traditional hotels to seek unique lodging experiences while enabling property owners to generate additional income from listing their homes. However, these benefits do not come without costs. Implications on housing prices, gentrification concerns, and pushback from homeowners’ associations and the hotel industry have spurred backlash and led state and local governments to regulate and even ban short-term rentals. Is there a way to mitigate these concerns without severely limiting the short-term rental industry?

Since its founding in 2007, Airbnb has become a fixture in the hospitality industry, rivaling popular hotel chains like Hilton, Wyndham, and Marriott. Airbnb has serviced over a billion check-ins at millions of listed properties, while its main competitor, Vrbo, lists over two million properties for rent across the globe. With the COVID-19 pandemic, hotel closures and social distancing concerns boosted the demand for short-term vacation rentals over hotels, and travel surged with the loosening of COVID restrictions. Seeking to capitalize off the travel boom and the rise of vacation rentals, investment firms have bought up thousands of homes across the country, with some venture capitalists sinking billions of dollars into the industry. This investment explosion has led to concerns that the short-term rental industry will lead to higher housing prices and rental rates in the long term.  

These concerns are not without merit. Short-term vacation rentals have been shown to increase housing costs, accounting for roughly one-fifth of average rent price increases and one-seventh of average home price increases. This issue is compounded by the fact that increasing profit margins encourage landlords to list their longer-term rental properties on sites like Airbnb and Vrbo, further constricting the residential rental market. Coupled with the already worrying housing crisis, price increases caused by the vacation rental boom have led to anxiety among many Americans, especially those living in areas where tourism makes up a large portion of the economy.

Many state and local governments were already regulating the short-term vacation rental industry before the recent boom. North Carolina has had consumer protections for vacation rentals under 90 days since 1999. In 2015, San Francisco passed an ordinance requiring short-term rental operators to be residents of the units they list, requiring property owners to register as a business with the city, and capping rentals to 90 nights per year for each residence. Honolulu has regulated vacation rentals since 1989 and has allowed only a limited number to operate since 2019. Boston limits short-term rentals to owner-occupants and has imposed a registration requirement. Perhaps the most severe pre-COVID regulation was in Santa Monica, CA, which has required hosts to live on-site, levied a 14% tax, and required registration of short-term rentals with the city government since 2015. When it was passed, the Santa Monica ordinance shut down roughly 80% of the short-term rentals in the city.

Since the recent boom started, cities and states have increased efforts to curb the issues caused by short-term rentals. Many California cities have ceased granting new permits for short-term rentals altogether, while New York City has imposed registration requirements similar to those in Boston and Santa Monica. Steamboat Springs, CO, impacted by a surge in new Airbnb listings, has imposed a near-total ban on short-term vacation rentals and has enacted a 9% tax on existing rental operations.  

The door is open for further regulation, too. In Nekrilov v. City of Jersey City, the Third Circuit upheld a Jersey City, NJ, ordinance imposing restrictive regulations on short-term rentals. The ordinance limited rentals to 60 nights per year, required operators to own the units they listed for rent, and imposed an application and permitting process, among other requirements. The court upheld the ordinance against Takings Clause, Contracts Clause, and Due Process challenges, acknowledging the city’s need to impose housing protections. This ruling suggests that future challenges to short-term rental ordinances may be similarly unsuccessful. 

There has, of course, been pushback to regulation. Some argue that regulation will negatively affect tourism costs. Some are concerned that regulating short-term property rentals will infringe upon the property rights of operators, with opponents in Arizona stating, “if you own that home and you want to rent it out, you shouldn’t have the city telling you that you can or cannot,” and a Rhode Island resident stating “I think it’s wrong for you to take my property rights away because you’re not happy with the way a few people are running their properties.” There are also concerns that regulation will not be effective, as regulations on short-term rentals in the UK and Canada have faced compliance and enforcement issues. Some also argue that the effects of rent increases are not as pronounced as has been asserted and that many people could lose out on the opportunity to make extra money on the side while they are away from home.

Solving the emerging problems presented by the short-term vacation rental industry appears to be a tricky balancing act. On one hand, sites like Airbnb and Vrbo provide diverse and affordable lodging options for travelers and give property owners the ability to earn supplemental income. On the other, most evidence suggests that these services are exacerbating an already worrying housing problem in the US. Highly restrictive regulations, like the 2015 Santa Monica ordinance, may be overinclusive of the problem and create anxiety about personal property rights, while inaction threatens to allow current problems to snowball. A middle ground may be possible, however. Imposing registration and permitting requirements, along with consumer protections like those in North Carolina, may offer a compromise to ensure the best result for both property owners and consumers.

Josh Chandler is a second-year student at Wake Forest University School of Law. He holds a Bachelor of Arts in Political Science and History from Texas State University. Before law school, Josh was a legislative staffer at the Texas House of Representatives. He plans to practice commercial real estate and land use law upon graduation.

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