Short answer: After reading umpteen articles, and news releases and listening to many interviews and podcasts on this issue, I support certain bans on short-term rentals. It’s not a simple issue. There are many stakeholders involved. I explain my view below.
A few months ago, New York City made headlines when it unleashed new rules that essentially wiped out two-thirds of Airbnb (short-term) rentals in the city. European cities will limit the number of nights owners can rent out properties each year.
Recently, in my neck of the woods, the government of British Columbia put forth sweeping legislation that doesn’t merely limit the number of nights, but bans short-term rentals altogether if owners don’t reside at the property. Exempted municipalities are those designated as tourist destinations such as Whistler and Tofino. I’m sure such exemption status will open up a can of worms as well. Those deemed tourist towns will grow tourism while those that didn’t make the cut will lose tourism.
I find the short-term rental industry and business model which is under attack, fascinating. As you’ll read below, it’s a multi-faceted issue that’s making headlines around the world as many towns, cities and regions grapple with it.
Why are governments doing this?
It’s simple and it’s a good objective. They want to lower the cost of housing (buy and rent) for residents. On the long-term rental side, it’s basic supply and demand. It’s been shown that neighborhoods in BC with more listings on Airbnb have higher costs for long-term housing [source: CBC News video].
With respect to the cost of buying housing, it’s an ROI calculation. Folks hold onto properties when they move because they can by renting it out. Moreover, now that there’s more money being earned from properties, the cost to buy goes up. It’s a classic return on investment analysis.
It gets worse. It’s self-fueling. As property prices go up, there’s more real estate equity available to tap to buy more properties, especially properties that generate revenue.
We can’t solely blame Airbnb for high housing prices
This is where I believe governments don’t fully understand the problem. Actually, they do, but refuse to admit it. It’s been a primary cause of skyrocketing property prices in Canada for years and that is the dirt-low interest rates in place for over a decade. Over recent years Canada put forth many futile schemes in an effort to lower the cost of housing such as empty homes tax and limiting foreign buyers. Such efforts made no impact because as long as interest rates made borrowing money almost free, housing prices climbed.
Add to that the Airbnb effect and you end up with a perfect storm of never-seen-before, out-of-reach housing prices. Now that interest rates are climbing yet housing prices are still quite high, it appears that the Airbnb effect on house prices is real. This leads me to believe that British Columbia’s widespread ban on short-term rentals will meet its twofold objective which is to lower long-term rent cost by increasing supply and lower the price of housing generally. The exempted municipalities will
Is this unfair to those who bought properties to cash in on Airbnb?
This is not the right question. It’s subjective. The answer will vary depending on who you ask. Those earning tens or hundreds of thousands of dollars per year with their short-term rental business will respond with a resounding yes. Those who can’t find a place to live or a home to buy will say no. Folks like me who have little skin in the game are indifferent or may have a strong opinion one way or another. As a homeowner, my built-up equity will drop when house prices decline. On the flip side, my property taxes may go down.
Regardless, it’s the wrong question.
A better question is whether the government should interfere with what homeowners can do with their property?
My answer is that governments should be able to interfere with what people can do with their property. Governments have long placed all kinds of restrictions on property owners. There are zoning laws in place, plus pages and pages of regulations. For instance, in my neighborhood, there are regulations setting out the hours when you can have construction being done on your property. The objective for this is to not annoy neighbors with noisy construction at night or early in the morning. Another example is in most neighborhoods you can’t set up a small factory in your backyard. Most residents of neighborhoods appreciate this otherwise, neighborhoods would become a mix of industrial zones, retail, commercial and residential. It would become an unpleasant place to reside.
So yes, generally speaking, governments should interfere with what homeowners can do with their property. When they overstep, which they do, they can be voted out. And yes, I get not all rules are good for all people. It’s the classic you can’t please all the people all the time. But I’m convinced that living with some regulations I don’t like is better than no regulations at all.
More to the point, are restrictions on short-term rentals good or bad? Are governments overstepping?
As one who has little skin in the game, I have to say that in the current climate in British Columbia and probably many other areas, these restrictions are good. There I said it. The reason I say this is because they will directly meet the government’s objective of creating more long-term rentals and lowering the price of buying a house. Often governments fail to meet their lofty objectives. In this case, I have no doubt that these restrictions will help the government create more long-term housing and housing affordability.
It won’t be without fallout. Tourism will be impacted to some degree. I’ve rented many Airbnbs as a traveler over the years. They’re often a better option when traveling with kids. Despite this, my view is that limiting short-term rentals is a good move.
As to why I have a “little” skin in the game instead of no skin in the game is it’s occurred to me that with far fewer short-term rentals available, as a homeowner in BC, I’m impacted two ways. One good and one bad. The bad impact is that housing prices will likely drop which means I lose equity. On paper, it’s bad, but given I plan to live in the home for many years, I don’t really care. Moreover, I support measures to lower the cost of housing because it’s out of reach for too many people thanks to ridiculously low interest rates for way too long.
The positive outcome of the short-term rental ban to us is if we rent out our home when we go on vacations, we’ll have much less competition and will command much more per night. Also, given we have a three-bedroom basement suite, that could prove to be a lucrative short-term rental as well (suites in houses are not subject to the BC ban… for now).
Will black markets end up making things worse?
No doubt, short-term rental black markets will crop up, especially in jurisdictions where the restrictions are onerous (such as New York City and British Columbia). They are already in New York City. “Black market” in the short-term rental world is not as nefarious as it sounds. It just means owners are advertising their units off the main vacation rental sites. They’re listing on Facebook and Craigslist. While it’s easy for governments to monitor the major short-term rental sites, they can’t possibly monitor the entire internet.
This is why in order for these restrictions to work, the fines must be hefty, which they are in British Columbia. They go up to $3,000 per day. That’s a risk I suspect many are not willing to take. If one is busted for a 7-day stay, that’s a $21,000 fine. At least, that’s not a risk I would take. If, on the other hand, the fine is $100 per day, that’ll have no deterrent effect.
What restrictions are best… full bans or limiting the number of days?
It depends on the government’s objective. European cities tend not to outright short-term rentals but instead limit the number of days property owners can rent out their units. My hunch is they do this for tourism. Removing Airbnbs during peak travel times would reduce the number of tourists considerably. These limitations will help reduce the cost of buying properties because potential revenue is limited.
However, if a government’s objective is to increase long-term rental, an outright ban is better. If owners can rent out properties for two or three months of the year and then rent out to long-term tenants for the rest of the year, that doesn’t help long-term rental housing. Most people need housing twelve months a year. What are they supposed to do during the two or three months during peak season? I only bring this up because some owners have publicly made the argument that they “mostly” rent on a long-term basis. I consider this an attempt at having their cake and eating it, too because most residents need year-round housing.
What about exempting the small-time investor who owns one short-term rental?
Governments often frame this attack on short-term rentals as going after the institutional investors who pursue Airbnb as big business buying up dozens or hundreds of units and cashing in. If this is the sort of model governments wish to primarily target, why not include an exemption for those who own one short-term rental… the person or family that does it as part of a diversified investment portfolio?
Given the short-term industry has been largely unregulated, it’s hard to know what percentage of owners have multiple properties and run it as a business. The industry is a mix of homeowners who rent out their home once in a while to the family that may own a second property as an investment to the institutional type owners who own many units cashing in.
On a recent episode of CBC’s front burner, it was suggested that 10% of the hosts earn the lion’s share of the money. In other words, most of the money earned is from a small number of institutional-style owners – those who pursue short-term rentals as a business. This figure certainly doesn’t help us understand how many owners operate a single unit.
I’m not averse to exempting those with a single unit but it’s also true that when exemptions are permitted, they get taken advantage of at some point and can compromise the entire set of regulations. For example, if a person or entity can own one short-term rental that’s rented out year-round, a simple workaround would be to register a new corporation for each unit owned.
So, while I do sympathize with the smaller investors, exemptions aren’t worth it.
What if future governments change the rules again?
This could be a problem. It’s why many short-term rental property owners are upset. Many purchased these second, third, fourth and so-on properties under a regime where it was legal to earn lucrative short-term rental revenue. I’ve not read of any short-term restriction schemes that include a grandfather clause that permits current owners to continue as-is. Obviously, that would pretty much render the new regime useless. Yet, I empathize with owners who invested in a second property as part of their financial portfolio. It’s not all mega-corps who own short-term rental properties. There are plenty of regular working folks who bought a second property to diversify their investments. Short-term rentals made it possible to do so. Now many will not be able to pay the mortgage which is telling because long-term rents do not earn as much as short-term rents… the basis of the problem to begin with.
If, in the future, a new government does a 180, it’s not good because it ends up becoming an unstable industry. Hotel owners that invested in building more hotels will take it on the chin. Speaking of hotels, as a person with kids, it would be great if hotels would create more multi-room options. Seems to me that hotels would be obtuse if they fail to realize from Airbnb’s success that many people opt for Airbnb’s because of the amount of space you get for usually the same or not much more money than the cost of a shoebox hotel room. This is why I’m a big fan of chains such as Embassy Suites which offers many larger one and even two-bedroom options.
What’s key is that whatever governments decide to do, they remain consistent. I get the whole short-term rental industry and cash machine that it’s become is a new industry but it’s been around a long time. I’m surprised it’s taken this long for governments to act. It’s not rocket science that when tens of thousands of properties are no longer available for long-term rent (28,000 BC listings on Airbnb) the price of long-term rent will go up beyond reach for most people.
What does this mean for people buying investment properties going forward?
It means don’t pay based on what a property could earn on the short-term rental market. No matter where you buy, it’s not a sure thing. While tourist towns in BC are exempt, the BC government did say individual municipalities can place a ban if they want. That means there’s not one single municipality in BC and generally anywhere in the world that is guaranteed immune from any government control.
I guess David Ramsay wasn’t off his rocker at all when he criticizes the short-term rental business model.
I’ll end with a hat tip to Premier Eby. I don’t agree with everything he does, but I have great respect for how he governs in that he actually gets stuff done. He was an effective Attorney General and is now proving to be an effective Premier.