Airbnb in the Hot Seat Again: Is this Company the True Culprit for Gentrification?
By: Alexandra Mitu
What was supposed to be a simple platform connecting travelers to homeowners with a spare room has now become a behemoth of the tourism industry.
Today, Airbnb lists more than six million rooms, flats, and houses in more than 85,000 cities across the globe, with the largest number of listings in London, Paris, and New York. Most impressively, the company has revolutionized the hotel industry, changed the way we travel, and reshaped cities around the world.
Along with its major success in recent years, Airbnb has also been heavily criticized for contributing to gentrification and for increasing the cost of urban living. A 2018 study found that a 10% increase in Airbnb listings in a neighborhood leads to a 0.42% increase in rent and a 0.76% increase in housing prices. Furthermore, Airbnb is responsible for a 1% increase in residential rent and a 2% increase in housing prices across the United States. However, in order to isolate Airbnb’s impact on the housing market, researchers needed to control certain variables such as economic trends and use Zestimates, property value estimations provided by the American real-estate database Zillow. Some of Zillow’s metrics have a margin of error as high as 7.5% depending on the neighborhood, which consequently influenced the accuracy of the research findings concerning Airbnb.
Nevertheless, we can reasonably conclude from this research that increases in Airbnb real estate reduce the supply of residences available for long-term rent. This market shortage then causes rent prices to increase, which makes these neighborhoods inaccessible to many.
However, Airbnb and its competitors, such as VRBO, Flipkey, Homeaway, and Booking.com, only contribute to these rent increases indirectly and are thus not immediately responsible for gentrification. All these companies have done is created a new category of rentals known as short-term rentals. Landlords now have a choice between renting long-term and short-term. Short-term rentals are much more lucrative, even if we account for the extra taxes paid by short-term rental hosts. For instance, in Barcelona, an Airbnb host can earn as much as €3000 per week by renting to a tourist instead of €800 per month for renting to a local. Additionally, one study found that on Manhattan’s Lower East Side, an Airbnb listing earns on average two to three times the median long-term rent. This creates a rent gap, where the actual economic returns of long-term renting stagnate due to laws prohibiting landlords from increasing rent, while the potential economic returns of renting short-term with the use of platforms such as Airbnb increase.
This phenomenon gives landlords the economic incentive to transform their long-term rentals into short-term ones, even if the rent gap is relatively small. The conversion is cheap because it requires no reinvestment, only the eviction of the existing tenants and some furniture. A study by the New York Communities for Change and Real Affordability for All found that Airbnb swallowed up approximately 20% of vacancies in the real estate market of certain neighborhoods in Manhattan and 28% of the market in trendy neighborhoods such as the East Village, even though it is prohibited to rent an entire unit for less than 30 days there.
With time, most long-term units in these popular neighborhoods will be organically converted into short-term rentals, which will create a shortage of long-term units in the market and consequently raise the median rent price. This will force out the lower-income population in these areas because they can longer afford to live there. Meanwhile, the long-term units that are left will be snatched up by higher-income newcomers who can afford to pay steeper rent prices and perceive the neighborhood as more attractive because it has now become more expensive. In other words, the neighborhoods in question will become gentrified.
The major problem associated with Airbnb that is advancing gentrification and raising prices is that of absentee landlords who use the platform to rent multiple properties. One study showed that ZIP codes with a greater number of owner-occupied short-term rentals have experienced only a small increase in rent in recent years, while areas with higher rates of absentee landlords have experienced considerably higher increases in rent price. In certain cities such as Los Angeles, the ratio of hosts to Airbnb units is as small as 1:20. Airbnb has attempted to mitigate this issue even though intervening hurts its bottom line. In 2016, the company started enforcing a one-host one-home policy in many countries and, in New York City, Airbnb polices its hosts by prohibiting them from renting a unit for more than 90 days total per year. These measures resulted in the removal from the platform of 4,800 homes operated by hosts with multiple listings.
Despite Airbnb’s intervention and monitoring of illegal rentals, many multi-listing hosts continue to operate illegally by using different platforms to rent their properties for longer than is permitted. Monitoring this issue is nearly impossible because it requires collaboration amongst platforms and for competitors to share important data with each other.
Thus, the solution is more complex than heavily regulating and taxing Airbnb or limiting the number of nights that landlords can rent their property short-term. The economic opportunity that arose from renting short-term will still exist despite regulations because landlords can use other platforms in addition to Airbnb or simply operate illegally. In 2015, Jersey City introduced a 6% tax on Airbnb hosts, which corresponds to the same tax paid by hotels, but this did not close the rent gap. The issuance of licenses by city halls is more effective than heavily taxing Airbnb hosts because this policy directly controls the number of short-term rentals on the market. However, the difficulty of procuring a license and the highly lucrative nature of short-term renting may encourage landlords to operate in the dark and thus continue to create gentrification. In Barcelona, short-term rentals must be licensed but no new licenses are being issued, and yet 2,577 listings continued to operate without the city’s approval in 2018. Cities should instead incentivize landlords to rent long-term by giving them property tax breaks and by monitoring and taxing the conversion of long-term rentals to short-term rentals. The initial rent gap must be closed or else the problem of gentrification will not be solved. Cities can close the rent gap by making short-term and long-term rentals equally profitable.
Furthermore, even if successful, these regulations are insufficient in eliminating gentrification as a whole because this urban planning phenomenon is inevitable to a certain degree (Dealing with Gentrification, n.d). Rapid job growth opportunities in an area, preference for a particular city or neighborhood’s amenities, and a shortage of available rentals all contribute to gentrification. Univeristé de Montréal’s new science complex gentrified the surrounding area of Parc-Extension and drove increases in rent because it made the neighborhood more in-demand for buyers and renters (Cyr, 2019). This means that even the construction of a central building can be a contributing factor.
Nevertheless, the economic opportunities for short-term renting are not without risk. Returns are uneven and depend directly on tourist demand for short-term accommodation, the attractiveness of the neighborhood, and seasonality. Currently, because of the COVID-19 pandemic, many short-term hosts are struggling after the demand for their units dried up quite suddenly due to huge decreases in travel worldwide. Many hosts are converting their property to long-term rentals, which are a more reliable source of income and require less expense. This may lessen gentrification if the housing market manages to reach equilibrium. However, in interviews with CNBC, Airbnb hosts admitted they were planning on returning to short-term renting after the pandemic is over. Additionally, those who used to list their property exclusively on Airbnb are now considering listing on other platforms as well for more visibility and because they felt Airbnb had hung them out to dry with its full refund policy in response to the pandemic. So, even if gentrification rates stagnate because of the pandemic and Airbnb loses market share, this development will only be temporary. The problem of gentrification will not disappear and only blaming Airbnb for the issue is not helpful. The problem lies deeper and is caused by the mass conversion of long-term rentals to short-term rentals; whether property owners do this through Airbnb or another platform is irrelevant.
In order to properly judge Airbnb’s influence on our society, we must also consider its positive impact on cities. Airbnb’s business model was built on the principle of the ‘sharing economy’ where individuals provide or share goods or services with each other in exchange for money. Airbnb founders Joe Gebbia and Brian Chesky accomplished their vision for this sharing economy, which simultaneously made travel cheaper, more personalized and authentic, and offered hosts additional income. Airbnb’s 2015 internal reports show that the company contributed to the economic wellbeing of its hosts, 52% of whom belonged to low-to-medium income households at the time. The platform also extended tourist travel periods by decreasing travel costs. Data indicates that 35% of Airbnb’s guests would have traveled for a shorter period of time or would not have traveled at all without the platform and that Airbnb travelers stay 2.1 times longer and spend 1.8 times more than a traditional traveler. This is phenomenal for the tourism industries of countless countries. The platform also provides economic benefits to neighborhoods that are normally excluded from tourism because three-quarters of Airbnb listings are not located in traditional tourist neighborhoods.
Lastly, it was reported in 2019 that Airbnb has paid $2 billion USD in taxes to governments globally over the past four years. However, critics such as McGill University professor Dr. David Wachsmuth state that “the extra amount of tax the hosts are paying and the Airbnb is collecting and passing along [does not] make up for the harmful impact of all the short-term rentals on housing availability and affordability in the province”. Even so, there is not enough available evidence or research that looks at both factors simultaneously to properly weigh the pros and cons of Airbnb and its competitors.
It is not fair to conclude that today’s gentrification of cities is mainly caused by Airbnb. In reality, the culprit is the gap in profit between short-term and long-term renting. Even if Airbnb ceases to exist tomorrow, gentrification will still occur. It will continue to be driven by illegal short-term renting, Airbnb’s competitors, or simply by real-estate developers who transform housing buildings into hotels, which reduces the supply of long-term rentals. Blaming Airbnb for gentrification is like blaming Apple for smartphone addiction—it does not make sense. Furthermore, critics of the company are also driven by powerful hotel lobby groups disguised as so-called ‘housing activists’. For the moment, Airbnb is still in business thanks to recent measures taken to mitigate major internal problems caused by the COVID-19 crisis. The San Francisco tech-based company delayed its IPO to 2021 after seeing its private market valuation lowered from $31 billion in 2017 to $18 billion, increased $2 billion in debt to cushion its balance sheet, undertook a 25% layoff of its workforce, and created a $250 million USD fund to help its hosts globally. The company also reached out to American Congress and the Canadian federal and provincial governments to ask that their hosts be eligible for loans and tax cuts, but so far no one is lending them a hand. However, according to Airbnb’s CEO, the company is ready to evolve and ensure that people continue traveling even if social distancing becomes the new norm for the foreseeable future.
Despite all the controversy, Airbnb seems to be here to stay.