Airbnb is a publicly traded company with over $90 billion market capitalization. However, the story of its founders is one of the most famous rags-to-riches stories ever. Brian Chesky and Joe Gebbia were roommates who struggled to pay their rent and didn’t have enough money to feed themselves. According to Chesky, he lost 20 pounds before Airbnb popped off because he didn’t have enough money for food.
Beginning of Airbnb
At the time of an Industrial Design conference, when all the hotels were fully booked, Brian Chesky and Joe Gebbia had the idea of buying and setting up a few airbeds in their apartment and called it “Air Bed and Breakfast.” They were later joined by Nathan Blecharczyk. Their idea did not bear fruit at first because it was hard to get people to trust them. Nevertheless, in August 2008, before the Democratic National Convention, they launched their website again and received 600 bookings. Later on, they used the election theme to sell cereal breakfast at their Airbnb which made them $30,000. As time passed, they received funding from several investors, the first of which was Y Combinator, a technology startup accelerator. Slowly but steadily, Airbnb became the multibillion-dollar company it is today.
A venture capitalist, Fred Wilson, was contacted by the founders to try to get him to invest in the company, but Wilson passed on the offer and asked them to leave a box of cereal for him. Sometime later, Wilson revealed that the cereal box reminded him of his mistake of not investing in the company. He said:
“We made the classic mistake that all investors make. We focused too much on what they were doing at the time and not enough on what they could do, would do, and did do. I am proud that our portfolio is full of companies where we saw the vision before other investors did and backed a great team. But we don’t always get it right. We missed Airbnb even though we loved the team. Big mistake. The cereal box will remain in our conference room as a warning not to make that mistake again.”
Great Idea for Owners But Not for Long-Term Tenants
Airbnb’s popularity rose due to high prices and overbooking of hotels, and it is still considered a great option in the short-term rental market. However, many self-serving people found it a great way to own many properties as Airbnb rentals allowed them to pay off mortgages very quickly. It is said that around 25% of the hosts own around two-thirds of Airbnb listings. A person buying more homes and apartments for vacation rentals than long-term rentals leads to a high rise in rents, and this phenomenon has been dubbed “The Airbnb Effect”.
In cities like New York, where there were more Airbnb options than vacant apartments at one time, in 2016, the residents were paying $600 million in additional annual rent. At a glance, it seemed like this was a high revenue generator for cities with high tourism, but most of it went to a handful of landlords. A 2019 Harvard Business Review study found that Airbnb alone was responsible for about 20% of the average annual increase in U.S. rents.
How the Airbnb Effect Leads to a Rise in Rents
Due to short-term rental being highly profitable and a way to increase the number of properties of an owner, short-term rentals are preferred by the property owners over long-term rentals. The increased supply of short-term rentals causes the supply of long-term rentals to decrease and increase demand. This is a simple law of demand and supply explained by Strategic Construction Advisor at Real Estate Bees, Jeff Akerman. He said:
“My understanding is that Airbnb, VRBO, and single-time rentals extremely affect the housing market as the housing stock that is being used for Airbnb, VRBO, and single-time rentals, are being withheld from the market and being used as hotel rooms.
That being said, this ultimately affects how many units are for sale at any given moment — when things are not for sale, that becomes a lack of supply. The lack of supply always follows an increase in demand. That increase in demand [makes] single-time rentals [a] major [factor] of the cost effect that we see in the housing market today.”
Controlling Measures
Due to the problems created by short-term rentals, many cities have started to put restrictions on them to create ease for the locals. A study reveals that the rent increase with an increase in Airbnb listings is less in the cities where owner occupancy rate is high. It was found that zip codes with an 82% owner-occupancy rate had a 0.014% increase in rents and 0.019% in housing prices compared to 0.024% increase in the rental rate and 0.037% increase in house prices in zip codes with a 56% owner-occupancy rate.
It is why, in cities like New York, a new policy was put into effect in early 2023. In New York, the Airbnb owners, known as “hosts”, will have to register their property with the city and provide proof that they live there. The new policy is expected to reduce Airbnb properties in the city by 10,000. If the hosts do not comply, they could be fined between $1,000 and $5,000.
Other countries such as Austria, Italy, and Malaysia have also taken steps to reduce or completely diminish Airbnb properties. By summer 2024, Austria will limit the number of nights hosts can rent out their property to 90. In Paris, the hosts cannot rent their property for more than 120 days. On the other hand, Italy has banned Airbnb and other short-term rentals in Florence. Furthermore, the Malaysian island of Penang has completely banned short-term rentals starting June 2023. Several other cities around the world have imposed even stricter rules.
Conclusion
Airbnb started as a great new initiative by determined individuals. However, opportunistic people have taken advantage of the profits gained by short-term rentals and created a housing shortage, causing an increase in rents for long-term tenants and a surge in prices for people seeking to buy a home for themselves. Airbnb is not necessarily an evil. It can boost tax revenues for cities, especially in places where there is a high tourist density. Nevertheless, due to a high number of properties owned by a few people, it has benefited few and created problems for more.
It is hoped that restrictions by authorities around the globe can offset the problems created by short-term rentals so that people can still take advantage of short-term rentals like Airbnb when hotels are fully booked or even if people are just looking for a homey place to stay in.
