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Have you thought about what happens in this model if we consider rent control? (I haven't thought it through, but it is easier to raise a question than answer it at this hour of the day!).

Thanks Frances, this is a great analysis.

Linda - great question. I would think that airbnb would make rent control more attractive to policy makers (as a way of dealing with upwards pressure on rents) and also less effective as a policy instrument (because landlords could substitute short-term renters, who were not rent controlled, for long-term, controlled renters). And to the extent that airbnb made rent control ineffective, that would give policy makers a reason to restrict airbnb - what do you think?

RI - thanks!

On the interaction of rent control and airbnb regulation: my first thought was that the existence of rent control would make regulation of airbnb a complementary policy, and might make it easier than more income support in part because it could be sold as a complement. Removing rent control rather than regulating airbnb might have similar effects, but would be more difficult politically. Might there be a second best argument that says regulation is superior to income transfers given the existence of rent controls?

All "accommodation" is not created equal- unlicensed for-profit operations more prone to health,safety & nuisance problems cause problem controls are costs

Joseph - yes, unlicensed for-profit operations' avoidance and evasion of health regulations, insurance, tax, is a serious problem. But it's hardly limited to Airbnb. Have you ever had the pleasure of dealing with the landlords in the "student ghetto" area of, say, Toronto? With some of them, just getting a rent receipt is a major production (and of course a rent receipt is necessary to claim Trilliium benefit). The way that some renters are treated is absolutely appalling.

Would I like to see a major crack-down on tax evasion in the so-called "sharing economy"? Yes. Are there serious issues around insurance etc in the sharing economy in general and with Airbnb in particular to be resolved? Yes. Would I like to see the landlord-tenant act actually enforced? Yes.

But, honestly, I don't know how many hotels you stay in - I stay in quite a few. The windows never open. So many have those noisy in-room air conditioning/heating units that cut in and out during the night and wake you up. Bar fridges that hum. Quite a few don't have coffee machines any more. Airbnb is destroying the hotel market because, quite frankly, it frequently offers a far more comfortable and pleasant accommodation experience than a hotel at a fraction of the cost.

It just kind of sucks for people who are priced out of the housing market.

Linda: "Might there be a second best argument that says regulation is superior to income transfers given the existence of rent controls?"

Perhaps. Can you spell it out?

Another issue with rent control and Airbnb: renters of rent controlled or subsidized apartments can rent them out on Airbnb for quite remarkable profits. I know someone who has done just that, and made a lot of money. They say still live in the apartment, mostly, and it's not necessarily a bad policy, but it is somewhat strange to be paying a thousand dollars for something you can pretty easily turn around and sell for three thousand. To me this just looks like one more distortion created by the (artificial) scarcity of urban housing. We are not building enough new housing in existing cities, and we are not creating more genuinely urban infrastructure. For me as a homeowner in a thriving city, this is a great financial boon; but it doesn't look very good for the society as a whole. We need more urban places, and we need more housing in the urban places we already have.

The problem I have with Airbnb is that by ignoring the licensing and regulatory requirements for their industry, they motivate other providers to push for a "race to the bottom." After all, why should a hotel have to comply with, say, handicapped access requirements, or pay hotel taxes, if the Airbnb providers can ignore these requirements? It's only a matter of time before the larger hotel chains get into the act, and start having "off the books" rooms at nearby apartment buildings.

As to rent control issues - allowing renters to easily violate the anti-subletting clauses of their leases with little fear of detection has a number of drawbacks - starting with landlords pulling the more desirable units permanently off the long-term rental market, and speculators outbidding long-term residents for the nicer units in a given market, then being forced to cut prices due to oversupply. (Look at the current fracking industry issues with oversupply forcing frackers to sell oil below the extraction cost merely to have some income to offset fixed expenses.)

All in all, disrupting a market is a fun catch phrase until your life is being disrupted. Boom and bust cycles in housing are fun for speculators, but not so enjoyable for renters when their local housing market is in a constant state of flux, where landlords are either evicting you from your apartment in order to cash in on short-term rentals, or going bankrupt from a lack of business.

Eric: "We are not building enough new housing in existing cities, and we are not creating more genuinely urban infrastructure."

And the question is: why? What are the obstacles to the creation of walkable neighbourhoods with medium density housing? Not west side mansions, not suburban super-sized homes, not Yale town or south-of-the-Gardiner type condo-upon-condo developments. Something in between those two. Does it just come down to zoning?

RepubAnon: "disrupting a market is a fun catch phrase until your life is being disrupted". And the question here is: whose life is being disrupted, and how? The story is more complex than a simple "renters being displaced" narrative - there are lots of inter-related markets here.

The thing that frustrates me about Airbnb is that no-one is being a historian about it. We've been there! We've tried the libertarian solution! It didn't work! That's why we have regulations! Hotel licensing! Now, we can argue about who were inconvenienced more by the old, free-wheeling "rooming house" days: whether renters, landlords or neighbours. I suspect that it's the last, and that the whole Airbnb thing is another example of spending social capital that we don't know we have to spend --mostly the currently robust state of public health and sanitation-- but that's as may be.

(Or it will be until the poop starts coming out of the ground again.)

Eric points out the problem of the shortage of new housing. Is it zoning? No! I mean, zoning is an issue; but people will seize on any kind of issue to argue against building. Trees? Too many, or not enough? Sight lines! "Undesireable elements!" Wildlife corridors! National Defence! (No, seriously.) Public gardens! People are walking their dogs on this 800 hectare not-developed-because-reasons parcel, so obviously the only way to go foward is to turn the whole thing into a massive park! Schools need room for children to play --a lot of room-- and there's no reason to shut a school down just because it has no students. I've gone three full blocks without seeing any restful green (I mean, a lot of green). So let's have a park! Really, when you get right down to it, why should people have to drive to the suburbs to play golf? No, we need an airport here. Not so much that it needs a road connection with the city, but we need an airport.

Let's call this for what it is: artificial restriction of a supply to keep the prices high. We know who benefits from this, and we know ... Wait. It's us that benefits! Maybe we just need to stop

This is a terrible post. To fix your charts, add a constraint that q_a + q_h = 1, and then make the demand curve for apartments really flat, run this as a multi-period model with huge welfare costs for the permanent residence and huge jumps in the demand curve for vacation housing.


Having to change vacation plans is less disruptive than losing your home, particularly if you are low income. The notion that 100 low income people losing their home is offset by 100 more vacation rentals misses the entire debate. If you are going to engage, then say something relevant to the debate.

The aggregate supply is relatively fixed, but vacation demand is very volatile, if there was no difference between permanent and short term housing then there would be enormous pain on the local residents should their city become a more popular destination, for example if there is a currency market change, or if oil prices drop, of even if it's a mild winter. Say there is a temporary surge in the demand for vacation housing, then a landlord could refuse to renew long term leases that expire at that time, and devote the unit to vacation housing to capture some of that demand, and when the winter is over, renew the long term lease (as permanent housing demand is relatively fixed in comparison to vacation demand). That would cause enormous hardship, and it would not result in more housing stock being added because land is a fixed monopoly and adding units is incredibly expensive.

For this reason, long long ago, cities took steps to separate the supply of housing available for tourism from the supply of permanent rental housing, via regulation, so that you cannot switch quickly or cheaply between the two. A hotel cannot easily be converted to into permanent housing -- there are zoning laws, regulations, business licenses, etc. In the same way, you cannot convert your house into a hotel. AirBNB just ignores the laws.

This splitting of the market has the effect of raising vacation rental rates and somewhat limiting tourism but in exchange for a stable housing stock available for long term residents, especially low income residents, because long term residents need only worry about the shock of a large increase in people wanting to *permanently* move rather than worrying about a mild winter.

This stabilization of supply for low income residents was viewed as being socially beneficial. Airbnb is undoing that, big time, and if you are going to try argue the opposite you need to make a welfare argument that loss of low income housing is no different than loss of vacation housing. Good luck, but in this blog you ignored everything important in this debate.

What you *could* try to argue is that heavy regulation on the supply side is harmful. That's nice, but then you need to attack things like height limits, density limits, requirements for neighbor approvals, etc. In large desirable cities it is effectively impossible to add to the total housing stock. Even without *any* regulation, once an area is built up, there are enormous costs to tearing down the 2 story buildings to replace it with a 3 story building. You can't just add another story on the margin. You need a new foundation, new structural support, etc. Because this is obvious to everyone, they don't try to treat this as supply demand curves for apples, and you shouldn't either.

That's quite enough attitude, thank you.

Here's what happens when you search Google Books for "rooming house police Toronto" and restrict the dates to 1880--1900:

i) A story about a recurrence of a smallpox outbreak due to immigrants passing through with out proper quarantine and then infecting others in their rooming house. (This comes up in several hits.)
ii) A boarding house set on fire by an improper telephone installation.
iii) A Freemason's convention. Every hotel, boarding house and rooming house is full.
iv) Several stories about bad food and restricted diets at boarding houses.
That's it, but doing this kind of search on Google Books is very lazy, so then I expanded it by dropping "Toronto."
v) A prostitution case; I thought she was boarding in a boarding house, Your Honour, I swear!
vi) People who make a habit of taking rooms at boarding houses and then stealing their fellow tenants' stuff. "Boarding house thieves."
vii) A law requiring boarding house proprietors to do the Nineteenth Century equivalent of a criminal records check, because of the above sort of thing.
viii) A postal service Gamergate troll (Nineteenth Century equivalent) arrested when his lettes were traced through his boarding house.
ix) More criminal records checks legislation, this time from New Zealand.
x) A case in which the discretion of a boarding house keeper to discriminate against certain customers is raised. It seems to be about wagon drivers rather than, say, the Coloured folk, but it's good to have a reminder on the point.
xi) Something that might or might not be an anti-Semitic diatribe about the dangers of having a rabbi as a boarding house tenant. Alternately, he is making profound points about various frailities of gentile society. So, you know, either way.

Of course, we didn't get rid of boarding houses because of this sort of thing. They fell away with the rise of modern, large homes and domestic appliances, I would imagine. But from the look of things, they were, or could be, a pain in the neck, back when they existed, and there certainly has to be regulation that does not apply to private homes.



I think RSJ has the right of it. The analysis here ignores the fact that people need long term housing, and converting long term housing into short term housing imposes a cost on existing residents, existing businesses and the government. Long term and short term housing are two separate markets. If there was an internet service to turn apartments into stores, offices, factories or nuclear waste storage facilities this might be more obvious. We could have solved our nuclear waste disposal problem years ago if we had adopted the last of those options, and I can almost hear some economist drawing supply and demand curves and talking about the usual non-existent mechanisms that will somehow make it all turn out right.

Kaleberg: "The analysis here ignores the fact that people need long term housing"

Er - no. I deal with that point directly: "But this is hardly a novel problem. Low-wage workers struggle to afford root canals and arthritis medication; they struggle to pay for fresh fruit in winter and kids’ camps in summer." People need lots of things - like food and clothing. There is a great deal of collective wisdom - from economists, from others - on how to help people afford the things they need to live. Most of that collective wisdom doesn't come down to "let's ban stuff."

Erik Lund - that's wonderful! Thank you!


rsj: "For this reason, long long ago, cities took steps to separate the supply of housing available for tourism from the supply of permanent rental housing, via regulation, so that you cannot switch quickly or cheaply between the two. "

Your comment, and Erik's below it, provide two competing explanations of the emergence and regulation of hotels. Your comment suggests that cities' regulation of hotels is about: " somewhat limiting tourism but in exchange for a stable housing stock available for long term residents, especially low income residents" Erik's comment makes me think that rooming houses were restricted because they were places that provided accommodation for low-income people, and low-income people brought with them a whole load of social and other problems.

The explanation suggested by Erik's comment sounds a heck of a lot more plausible to me. A great many zoning regulations - e.g. bans on basement suites, limits on the division of houses into apartments, requirements that every bedroom (actual or potential) have a window - have the effect of restricting the supply of lower quality, lower-price accommodation. Why are they put in place? Because low-price accommodation brings low-income people, and existing residents not infrequently see this as undesirable.

Sorry, the idea that restrictions on Airbnb - excluding things like insurance, accessibility, safety, tax compliance, etc - have purely benevolent motivations strains credulity.

Frances, nice post.

I think that we tend to forget that if something is profitable, and there are no externalities, then it's socially beneficial. That goes for Airbnb, Uber etc. I would like to see Uberization of the entire economy!

Markets are wonderful things and Uber and Airbnb show just how many gains to trade are possible. I find your focus on pecuniary effects an unfortunate reflection of the current state of the popular economic zeitgeist. I know that “inequality” is the new buzzword of 21st century economics, but it's a bit weird, and perhaps dangerous, to test the worth of every Pareto improvement from trade against some bien-pensant normative standard of inequality.

The great threat to our economies is long term sclerotic growth. We could afford inefficient economic (managed stakeholder) policies in the past – mastering the physical world over the last half century kept leading to radical improvements in our lives every year – we can't now. We need to find growth under every rock. In a world that is becoming intensely service based, worrying about pecuniary effects from more efficient market allocations cannot be our concern. I think we need to keep in mind that the fight over Airbnb is really about the politically strong using government power to tyrannize the poor and the weak. Waging that fight in the name of “inequality”, zoning, regulatory compliance, etc., is just a smokescreen for keeping the status quo.

There will always be wealth inequality; there will always be the lowest decibel. If we want to help the poor or least fortunate, let's, as you point out, help poor people, but let markets allocate. More than ever, the welfare state is going to need growth to pay for itself.

Frances,

You cannot look try to look at historical motivations this way. The minimum wage was first supported by many in the business community as an effort to suppress unions, and was opposed by many unions who wanted people to join the union in order to get a good wage. If everyone got a good wage, there was no reason to join. Here the history of motivations is complex.

Historically for thousands of years there was no requirement for landlords to provide any habitability. The idea that a renter was purchasing a *housing service* rather than just paying to live on someone else's property is relatively new. It makes a big difference. If you are just paying to not have the landlord call the police and kick you out, then the landlord does not need to provide you with running water, or a fire escape, or privacy. The landlord can enter your property any time and rifle through your belongings. If something breaks, the landlord doesn't need to fix it. And it started at the turn of the 20th century but really took up steam in the postwar era that laws (slowly) were adopted requiring basic heat and light, running water, sanitization, minimum space and height of ceilings, fire escapes, privacy, and with them a whole series of zoning requirements that in your argument "just drive up costs", but which were intended to recognize that the renter was purchasing a service and so the landlord had an obligation to provide a service just as much as the tenant had an obligation to pay rent. The landlord needed to fix the heat when it went out.

This was not done to get rid of poor people, anymore than the minimum wage was not done to get rid of jobs, or food inspections were done to get rid of restaurants. It was done because the market fairy tales came into contact with reality and people decided that poisoned food, buildings that fall down, and slave wages shouldn't be endured in order to comply with fairly tales.

Now many such regulations were exploited to get rid of minorities (and to a much lesser extant the poor), especially in wealthy areas. So yes, it's complex -- requiring a minimum living space of 200 sq feet per unit is a lot different than requiring a maximum number of people per lot (what you see in most suburbs). And some of these regulations -- e.g. laws preventing excess shadows and EIR requirements -- were done just with the intention of preventing existing occupants from being subject to more density.

But If you don't believe long term housing is favored, as a public policy, you have to ask yourself why there are special hotel fees and taxes, in addition to sales tax, whereas rental payments are not subject to *any* tax. Why the licensing process is more onerous for vacation housing, why zoning laws limit which lots may be used for vacation housing and are much more restrictive, etc.

Now what happens when you arbitrarily allow one group to skirt just some of these regulations, given that total supply is fixed? Imagine that there is a (natural monopoly) and to counter that a monopsony is formed, and then someone comes along and breaks up the monopsony but not the monopoly.

Today, AirBnB allows landlords to illegally skirt these requirements and so is opposed because it makes the long term rental stock subject to the same volatility as vacation rentals. Now given that the total supply is fixed, and vacation demand is *very* volatile, breaking down these barriers creates a lot of hardship that people living in these cities see as units drop out of the rental stock very quickly. In response to this hardship they crack down on AirBnB. But if you want to weigh in on this, then address the arguments being made rather than painting more fairy tales about how requiring fire escapes or seismic reinforcement is welfare reducing.

rsj - I'd suggest googling "tiebout zoning".

Tiebout zoning is interesting in terms of offering people an incentive to move out of areas under pressure. But here again, the poor are at a disadvantage as they are less mobile and are more in need of being close to centers that provide services for them.

I'm very pessimistic at ever finding an efficient solution for land use and allocation

People are horrible at managing their assets. I live in San Francisco and there was incredible opposition to forcing building owners to seismically retrofit their units. No one buys earthquake insurance. The housing stock is damaged due to neglect and ignorance. Just in the last year on my block there were two large apartment buildings. The first was an old building and the owner decided to (illegally) convert one bedroom units into 2 bedroom units by knocking down the walls, which of course had lead paint that was aerosolized by the sledgehammers and it contaminated the whole building. Many tenants became sick, and the owner didn't tell anyone -- they were dumping the dust into the trash. It's going to take years of expensive rehabilitation. They were fined but rents are so high that they can easily absorb the cost of the fines. Unfortunately no one sued them. The building on the other side of me was a new building, a "Green" building owned by a large REIT. But the architects skimped on the construction and it has negative air pressure as well as lack of proper sealing, so there is already a lot of water damage and mold. The REIT isn't doing anything as their asset rots, and the property management company doesn't know anything about managing a modern building.

Building owners just do an awful job and it's not because of regulation but incompetence/complacency. Here I'm not even talking about the cat woman living in a crumbling mansion on Nob Hill, or dead bodies discovered when the recluse of a house in Noe Valley finally died, or the abandoned burnt out Hotels that the far away owners refuse to sell. I'm talking about the general case of optimization being really hard to do, particularly with an asset that has so many emotions wrapped up in it as housing. When a market isn't competitive, then bad decisions don't get punished enough to drive the decision makers out of the market. That's an aspect of monopolistic competition that isn't included by macro people even though the mantra of the virtue of market discipline is heard by everyone. If we need market discipline, then someone needs to be disciplined, which means that someone isn't optimizing properly, which means that you cannot assume that the correct decisions will be made, even if market incentives are allowed to work. The probability of a correct decision made is proportional to the inverse of the market power. Many people here have houses they use for retirement income, and they prefer to be left alone and receive the check. They don't think about whether they should re-seal or replace the plumbing until something goes wrong, at which point it's too late. If a fire marshall didn't inspect their property and write them a ticket, they really wont put that sprinkler system in, even if it makes sense for them to do so. They pick their property management company by whoever charges the lowest fee. Everything is done somewhat randomly and inefficiently, and as you move to more desirable areas where the monopoly power increases, so does the stupidity. I'm a big fan of onerous land taxes just to create a mechanism to force landowners to efficiently use their land or go bankrupt. No one should let a building go idle for a few years while you figure out what to do with it -- and the cat ladies need to be forced to sell and move into a smaller place where they can receive care.

Also it's really hard to add to the local housing stock. San Francisco has record high rents and condo prices, but it is adding something like 1% units per year (gross, not net!) at the peak, and closer to 0.3% in other times. I'd like to blame onerous zoning laws for this, and I used to do that until I realized that introduction of more stringent zoning didn't really impact the infill rate much. Now I don't think that cities can accomplish a lot with infill development. Cities grow by expanding outward, not upward. The historical trend for population density is to decline, not increase, even as buildings get taller (e.g. http://www.nytimes.com/interactive/2012/03/01/realestate/manhattans-population-density-past-and-present.html). So for those communities living in a constrained area, it really is a zero sum game. The housing stock is fixed and there is no mechanism to drive out incompetent owners. Everyone has to live with them. Even though the regulations can be insane, they are often more sane that what private individuals do when they are given an unearned windfall and face no competition.

Add to that that people aren't really good at making long term decisions even when they try and you have the workings of a huge mess. I really don't think that housing is the place to look if you want to highlight some econ 101 static equilibrium principles. Look at oil prices instead for that.


For one example -- housing costs and rents in Seattle have skyrocketed in the last couple of years, and it was already a fairly expensive city. Seattle recently has had to outlaw apartment rentals for short-term stays after wealthy investors bought apartment complexes and and then turned every unit in the building into an airbnb. The city did the right thing. This article seems naive at best, dishonest at worst, about the negative effects of this trend. Bottom line, airbnb can have a negative effect on working people trying to afford shelter.

"If something is profitable, and there are no externalities, then it's socially beneficial" -- this is one of the bigger crocks of shit ever foisted on the public. At any rate, there are externalities in the abuse of the airbnb model -- the loss of affordable housing. I suppose you consider privatized prisons "socially beneficial" as well, how about drug dealers, arms dealers, etc. All quite profitable, but at whose expense?

Lord Koos,

“...there are externalities in the abuse of the airbnb model -- the loss of affordable housing.” No, that is a pecuniary effect. It's like saying that because rich people buy Ferraris, which are in limited supply, they drive up the price, so it's not fair - the government should ensure that I have an “affordable” Ferrari. No!!! That's not economic reasoning. Whether the surplus ends up on the consumer or producer side is not relevant – it's the efficiency that matters.

If it were true that buying up all the condos in Seattle and converting them to Airbnbs was profitable, then the market is saying that it is more valuable to use the land that way than any other. Remember, no one is using a gun to force people to sell to developers at prices they don't like. And also remember that people are choosing to use Airbnb accommodations. No one is forcing (and by forcing I mean threatening violence) to do things they don't want to do. How is it moral to stop the most productive use of a resource because you don't like the new equilibrium? Who should decide? And why is it moral to use force against adults who are selling at prices they find mutually agreeable?

Affordable housing is a huge destructive source in society. It's monstrously inefficient and serves to warehouse undesirables. It's just awful. I see it first hand as a Big Brother to a teenager in social housing. It imposes the highest marginal tax rates in the country on the poorest people in society – in most cases well over 100%. I'm all for helping poor people. They need housing just like they need clothes and haircuts. Give them direct supports, but in-kind transfers in the form of subsidized affordable housing has been and always will be a human disaster story.

It is an economic fact: In the absence of externalities, if something is profitable, it is socially beneficial.

anybody who thinks AirBnB is not taking up rental housing units is sitting in an office all the time looking at charts and not getting out into neighborhoods that have become totally infested with tourists while the locals can't find a place to live

Michael Haley,

Why is this a problem?

Avon: Have you ever taken a good look around you at the assisted housing centre and marvelled at the way these people are their own worst enemies, on account of being blithely self confident that they're just right aboout something that they're actually dead wrong about?

That's what they call a hint, son.

Anyway, let's first take it to cases. How do you run a grocery store when your junior staff can't afford to live in the city? Let's get even more general, and talk about, I guess, externalities or deadweight or what-have-you in the way of fancy-economics-talk-phrase for the cost of constantly training 20 year-olds who quit the drug store in Richmond to move in with their girlfriend in Burnaby and hire on as grocery clerks, even as the drug store is training the former grocery clerk ex-room-mate of the girlfriend, who quit the grocery store to move back in with his parents in Richmond? These are huge costs we're levying on Canadian society --and, remember that you're relying on us for clean food, as well as short lineups.

These may not be "good" jobs at the "leading edge" of the "knowledge economy," but they are necessary jobs. They're the kinds of jobs that city fathers of successful cities have struggled to keep filled, and that the city fathers of failing cities (oh, yes, they exist, too) struggle to get their no-good brothers-in-law into. That's centuries of people dying of hunger one day, and labour shortages the next.

So, since it's not Uruk Expansion times any more, we come up with solutions. And those solutions are social interventions, since, after all, there is nothing more socially constructed in this human universe of ours than a city. Mostly, they take the form of rent supports. I won't bother explaining why we don't just hand out "income supplements" to people. You've been in social housing. You know. There are various Libertarian argument against this: get rid of regulation, and a better world will supervene; or it is unsustainable and will come crashing down any day now. Or both! Neither line of argument is going to get you anywhere, Avon, and it is pointless to press them, when what you really need to be doing is asking why what is so obvious to you isn't at all obvious to anyone else. (I can also explain why you can't get a patent on your perpetual motion machine, if you'd like.)

WThe third argument, advanced by Frances, is that regulatory capture leads to interventions that price out poor people (because we don't want them around) and push house prices (so that owners of existing stock make more money when they sell.) I live in a city. I travel around it. I am hugely sympathetic to this. The amount of hoarded, misallocated, not-built-on and excluded land that I see around me is very irritating.

I just don't think that undercutting the value of existing hotel stock --or cab licenses-- is the way to go. Precarity is a horrible way to live. People in dying industries live precariously, and the people who sell them drugs and groceries find their lives made more precarious as a result. High rents contribute further to precarity, and rebound entirely to the advantage of, uhm, people who live off rents? That's a bad thing, right?

Again: this is not abstract, sophomore talk of abstractions and logic-splitting. If you've been frustrated by not being able to find an item at the store in your last shopping trip, or if the lineups were too long, or if the staff were hurried and rude to you, it is very directly because of the precarity of the lives of these service workers. (I won't even get into the consequences of their inability to form households and have families, lest I be considered some kind of monomaniacal crank, like some commentators around here.)

So, speaking as someone who rarely stays in hotels, never uses Airbnb, and doesn't need Uber, I think they should all be banned. Then everyone can have good jobs, and splurge on the expensive cheese when they're in the grocery store instead of the Kraft stuff! Which, I think, is a social good we can all agree on.

Michael - "anybody who thinks AirBnB is not taking up rental housing units"

No one has made this claim. The point being made here is that AirBnB is able to take up rental units in part because hotels aren't competitive with Airbnb from a price/quality point of view. While some of this is due to differences in regulation, enforcement, etc., price discrimination is an interesting, and often overlooked, part of the story.

"locals can't find a place to live."

Locals can find a place to live. They just can't afford the rent or mortgage payments. Why not? There are a whole load of possible explanations. Increased income inequality. The attractiveness of real estate as an investment when interest rates are near zero, combined with a demographic bulge of near retirees as well as off-shore investors looking for safe places to park money. Zoning regulations. Divorce. Old people living alone in West Side mansions and refusing to downsize. The concentration of economic opportunities in a handful of global cities. Manhattan is an island. Vancouver is hemmed in by mountains and water.

Airbnb is an easy target. But if you look at, say, Airbnb listings in Vancouver, you'll see that they are concentrated in a few neighbourhoods. Airbnb can hardly explain the affordability crisis in Burnaby - there just aren't that many listings.

"neighborhoods that have become totally infested with tourists"

One person's infestation is another person's income.

Lord Koos: "Seattle recently has had to outlaw apartment rentals for short-term stays after wealthy investors bought apartment complexes and and then turned every unit in the building into an airbnb. The city did the right thing."

Has there been any documented decrease in rents in Seattle? Any increase in vacancy rates?

@Avon Barksdale:

> to test the worth of every Pareto improvement from trade

As a nitpick, this is more of a Kaldor-Hicks improvement.

@Erik Lund:

> How do you run a grocery store when your junior staff can't afford to live in the city?

You're begging the question. Wrenching the housing market by these sorts of regulations only acts to insulate society from its own choices. If a grocery store needs junior staff and wealthy people in the city need grocery stores, then the obvious conclusion is that grocery stores should close until they raise wages (and prices) such that its staff can afford to live within an acceptable distance.

Your essential argument is that we have to preserve a crappy standard of living for some people, so that businesses might keep their costs down. This is an openly ridiculous argument when phrased as "we can't raise the minimum wage because otherwise hamburgers would cost $5."

> People in dying industries live precariously, and the people who sell them drugs and groceries find their lives made more precarious as a result.

If these industries are truly dying, then keeping them on life support is not a solution. It's not even particularly charitable compared to other policy options, precisely because that intervention arises just at the edge of industry-death.

Majormax:

You're quite right. Grocery stores, and the service sector in general, need to pay more, and structure our payscales so that our new hirees have an expectation of a "just wage" if they stick around. This point has not gone unnoticed within the industry. (It is ridiculous that my store is short two-and-a-half category managers in grocery alone, and cannot even guarantee full-time hours to someone hired to run them.) We even make spasmodic and ineffectual efforts to address the problem, and it will be very interesting to see what my company puts on the table in the upcoming Safeway Extra negotiations. Unfortunately, we also participate, as an industry, in persistent efforts to overcome that whole "downward stickiness in wages" that's apparently holding back the recovery. It's pretty hard to go to the board and ask for permission to lose more money by raising wages. (Though, apparently, it is easy to go to the board for permission to lose more money by throwing out prepared food. Seriously, guys?)

Moreover, Vancouver doesn't have a rental crisis. We may even have a shortage of renters, insofar as we can parse what statistics we have. (We rely on the Real Estate Board of Greater Vancouver for our numbers on the "Vancouver housing crisis." I don't see a problem. Do you see a problem?) What Vancouver has, is stagnant wages coupled with a rapid escalation in the price of single detached homes, with very little pressure to expand the available supply.

If the anecdotal evidence of unlikely tenants in my neighbourhood has any value over and against the Real Estate Board's pronouncements, Arbnb listings more likely reflect landowners' and sublettors trying to reap more return from sagging rentals. Although if I go by anecdote, the situation might be turning around. (That is, the toddlers downstairs are out and into a house, and a pair of graduate students are in :-()

What actually appears to be happening in Vancouver --not necessarily San Francisco, or Seattle-- is that people are buying stores of value, and the actual inelasticity is the number of people who need house-shapped piggy banks.

No, wait. It suggests that the actual problem is the global rise of precarity, causing a flight of capital into the real estate of growing cities in stable societies. Whatever my company might want in a perfect world, it is not going to turn that flight around on its own.

Avon,
It is an economic fact: In the absence of externalities, if something is profitable, it is socially beneficial.

Yes, if a *fictional* trade is done voluntarily, then it improves *utility* (NOT "welfare") *over the trade not being done* in our fictional world where people have nice utility functions that explain all of their actions and (consequently) in which information processing is free.

But you don't have any info about a global maximum even of utility in your fictional world, and really you don't have any strong results here at all, certainly nothing that applies universally to real people facing complex choices. If a 12 year old goes to work in a sweatshop rather than staying home on the farm, then it is because she wants to do that. Huraah. It *doesn't* mean that this is the best possible arrangement, or even a good arrangement, of available choices. Nor does it mean that she is making the right choice for her -- she may have been pressured into this choice, or no one may have told her of other options, or schools may not correctly weigh the possibility that she would produce more, in 20 years, as a graduate of a school than as a worker in a factory. But yes, it was a "voluntary" choice and so utility improving if the girl would have such a thing as utility. We could do with a lot less econ 101 stuff.

Erik,

I love Uber. It's the opposite of AirBnB. Before Uber, many cities had taxi monopolies that limited the number of taxis, and uber is increasing supply and competition. In a sense, the medallion system tries to convert taxis into real estate, with the concomitant corruption and incompetence, and Uber tries to break those artificial monopolies. Maybe you don't realize how evil the taxi monopolies were before. In my city, the gate is $150 (12 hour shift). So that's $300 per day and assuming the taxi is in operation 80% of the time, that would be about $90,000 per year that the cab company earns leasing out a taxi that probably depreciates by only $10000 per year. That's an insane profit margin. Look at prices of medallions. Anything to destroy those parasites is an unmitigated good.

My concern with Uber is algorithmic pricing. What is to force them to charge you the same price as someone else? They collect a lot of data about you, and in principle can predict when you're willing to accept a fare hike and when you are not. So what is to prevent them from stealing the whole consumer surplus for themselves? It would be a free profit for them just by changing some code, so why wouldn't they do that? Uber is very scary. I would really prefer if Uber did not set a price and switched to an auction system where each cabbie picked a price and advertised it, and the driver chose the cab (much like eBay). There is at least one price fixing lawsuit against Uber around this issue. I think Uber would counter that the cabbies would not correctly set prices, leading to artificial shortages and gluts, and if true, this would reveal a lot about the difficulties/costs of actually reaching equilibrium in more real world settings.

Majromax,

Real estate regulations don't protect "society" from "it's own choices". They protect the *rest of society* from the choices of *others*. Land is really a shared resource. The value of your land comes almost entirely from what is happening outside of your property line. You may decide that the best use of your prime downtown lot is as a memorial to your childhood hamster, and that in order for people to get from point A to point B, they need to drive around your lot instead of through it, however that may not be the best social use of the land, and so there are zoning laws and public easements. So you need to really argue that the zoning laws (that AirBnB is violating) in this instance are bad, which requires more than a general "all zoning laws are bad" type argument, because such an argument is easy to destroy.

Also, I think you are underestimating the costs and the ability of a distributed system to make adjustments. A good urban area, much like a good productive area, is an ecosystem. Across the bay I spent time in Oakland, which was really sad, because even though they had beautiful buildings, the sidewalks were empty of people and there were too few stores open downtown. So there are no stores because there is no foot traffic and no foot traffic because there are no stores. There are all these feedback loops. The freeways cutting downtown Oakland in two really hurt the foot traffic, but no one knew that when they buillt the freeway -- oops. However I don't think undergrounding the freeway would bring the foot traffic back at this point. There is hysteresis. Cities are fragile eco systems, so society has come to adopt a type of conservatism to not make big disruptions and to try to preserve what is viewed as important to city life. For example, bakeries. This has come from many generations of people living and working in cities and seeing the effects of change. That shouldn't all be thrown away as we race to some year zero anti-historical anti-social market fetishism. In other words, some humility is called for even though I think wages shouldn't be raised to satisfy landlords either.

This is totally unrelated to the current post...but I just wanted to say that the comment threads on this blog are, in general, the most civilized and the most enlightening of any economic blog I read regularly. I thank everyone who posts and comments here for that.

We are Canadians, eh?

Donald - the credit goes to Stephen and Nick, but thanks! I've been out of the country for the past week or so (http://www.plas-efenechtyd-cottage.co.uk/ - very very highly recommended, and competitive in price with Airbnb), so have been glad to see the conversation going off in fascinating (if slightly off-tangent) directions while I've been walking in the Welsh hills.

Now that I have official permission to go off tangent (or a reading comprehension problem), I'll drop this here.

http://vancouver.ca/home-property-development/little-mountain.aspx

In 1954, on a fifteen acre lot, adjacent to Queen Elizabeth Park in the Vancouver-Little Mountain neighbourhood of working class East Vancouver, the city opened a social housing development with 224 units. In 2009, the dilapidated buildings were torn down, leaving the very big empty lot already noted.

Today, seven years later, community hearings open on a development proposal that will put 1400 housing units.

The City of Vancouver's 2011 Census population was 603,500, domiciled in 264,570 households. So that's enough housing for more than 0.5% of the population, right there.

This is the part where I casually mention that when Pacific Spirit Park was chopped out of the University of British Columbia's Endowment Lands, 763 hectares were removed from Metro Vancouver's inventory of future development land.

If a shortage of available land is driving up real estate and rental costs in Vancouver and driving sprawl, it's because that's what the community has decided should happen. (It's enough to drive me to sympathise with Avon.)

Maybe I missed it in the comments section but surely part of the appeal of AirBnB is making a more efficient use of existing housing stock. If I let out my condo for the two weeks in he summer when I'm on vacation that effectively creates (albeit temporarily) a housing unit which wouldn't otherwise exist. So it's not just a story of shifting units from long-term housing stock to short-term, it's about creating new temporary short-term housing from from existing housing stock at no (or minimal) cost

Craigslist has let you do that for a long time. No one complained. Well, newspapers complained about craigslist destroying their business model, but long term tenants and owners don't care about this use.

It's like car companies and Uber. No one cared about being able to call up a company and order a car to pick you up. It is (or was) legal. People complain when this type of use starts to heavily displace cab usage because you can carry your phone on the street.

With AirBnB, people complain when long term rental units start being displaced and long term owners find that they are suddenly living in busy hotel districts instead of quiet residential districts.

It is the mass zoning/tax arbitrage that makes people upset, and AirBnB wont share data with local authorities about who is doing what; they are fighting a scorched earth war to avoid collecting hotel taxes or to respect local ordinances.

Unlike Uber, the customers don't live in the places where AirBnB makes the biggest impact, so you have to really live in one of these cities to understand the level of hate. It has nothing to do with lending the keys out when you are in Paris.

rsj: " It has nothing to do with lending the keys out when you are in Paris."
In fact, given the strenght of the reaction, AirBnB might eventually makes very difficult to lend keys to your parents and friends. How do neighbors and authorities diffentiate sharing from outright renting?

rsj: "With AirBnB, people complain when long term rental units start being displaced and long term owners find that they are suddenly living in busy hotel districts instead of quiet residential districts."


Hotels are facing the possibility of a major hit to their bottom lines as their busy hotel districts get turned into half-full hotel districts. Long-term owners and renters in quiet residential districts just aren't that affected because quiet residential districts are, overwhelmingly, not desirable as Airbnb locations. Think, e.g., of Rosedale or Hyde Park or even Trinity Bellwoods in Toronto, Burnaby or Coquitlam in Vancouver, Alta Vista in Ottawa, Garrison Woods in Calgary - these places just aren't that attractive as Airbnb destinations, because they're not walking distance from the downtown scene, museums etc. Yes, sure, there are probably some downtown condos where owners are up in arms over Airbnb in rentals - but they would also be up in arms over empty units, rentals to students, rentals to people with yappy dogs, etc.

My view is that by far the most plausible source of fuss over Airbnb is a major industry that's strongly effected by it.

Re your point on zoning arbitrage: given that zoning can contribute to urban sprawl (e.g. Ottawa) and social segregation (e.g. every city that curtails the inflow of lower income residents by banning or restricting basement suites, imposing minimum lot sizes, etc), I'm not convinced that a bit of zoning arbitrage is such a bad thing.

This problem can be solved if cities introduce a registration process for owners wanting to rent out their property -- many already have -- and decide on the limits of legal use. For example, you can rent out your property 20% of the time or whatever, as long as you collect the appropriate taxes. Then AirBnB and other services can give monthly data dumps of who was renting out their place to whom and for how much in each county. That doesn't place a burden on AirBnB. That leaves informal networks, but informal networks don't let you rent out a billion stays per year. To make a mass effect you need a mass network (e.g. on the internet). And the nice part is that networks can't hide -- they are extremely sticky natural monopolies.

Then in the city a simple script can compare that against the list of registered owners downloaded form the big networks, verify that the appropriate address has been registered and that the taxes were paid, and that the use was within whatever limits the city prescribed wherever that property was zoned.

For excess use, get a bot to start sending out the fines -- just add them to the property tax bill.

Then each city can have a debate as to how many times you can rent out your house on these types of platforms before it stops being "owner occupied" for purposes of property taxes and zoning. Maybe in some areas you can do whatever you want, and in other areas you can't, just like you can run a business out of your home in some places but not others. Let the communities decide how or to what degree to regulate this, but AirBnB shouldn't be a Mossack Fonseca for small time landlords. AirBnB needs to stop pretending that these transactions are trade secrets that must be hidden from local regulators.

We were just in Dorsoduro in Venice and rented a place with a homesharing service. For each property, there is an inspection for working plumbing, minimum square footage, etc. That's important in Venice since the state of the housing stock is so shoddy (all of Venice is slowly rotting, but it's a beautiful decay).

Then the landlord collected the rent and property taxes, gave us a receipt, and took photocopies of our passport to the local police, just like in a hotel. It was painless, and Venice is overrun with short term rentals, so it wont kill the market. But it does restore local control and the tax base.

Frances,

Each city is different. Hotels in the SF metro area have an occupancy rate higher than every before (84%, compared to 64% in 2000), and the average daily rate has climbed from $154 to $208. U.S. historical average is around 60%.

The nice thing about zoning laws is that they are local. You can change them. So I guess this is where economists no longer trust people to make decisions or understand what is best for their welfare -- one person can make a decision for themselves but 10 people together can't. One person can arrange their own condo, but an HOA for all the owners living together can't make any rules? Does this also apply to trade agreements?

When is it a good idea to violate contracts you don't like because technology makes it easy to do so? AirBnB allows users to break the law on a mass scale, which is why they are constantly in court.

What other laws do you think it's OK to just walk away from because they might be abused in some cases? And why not make a case that that the zoning laws should be changed instead? If you make the case but don't succeed, are you willing to credit those who oppose you with some insight and valid concerns, or are they just racist?

Frances, perhaps I'm stating the obvious here but your post strongly hints at another potential reason for the actions of the New York legislature. They were elected to care about New York voters and for most of them AirBnB is certainly harmful both in terms of wealth and inequality.

The beneficiaries are tourists and landlords, the losers are hotel owners and lower income locals. If the legislature ignores the needs of your hypothetical tourist from Tulsa, I think you can see why they would find AirBnB harmful. A counterargument might be that the local economy gains from having more tourists. While this is true, a big part of the gain from tourism comes from hotel accommodation which has obviously been reduced.


@Rsj
Democratic politics is a very imperfect process and there are a number of cases when welfare gains can be made by circumventing laws. A great example is the Indian labour laws for industry. Compared to Western Europe they are not particularly severe but in a poor country like India they make hiring workers prohibitively expensive for all but the most high quality manufacturers. However they were conceived in an era when services were considered unimportant which is why they don't apply to that sector. Many people with an in-depth knowledge of the country consider this to be a crucial reason why the Indian service sector has been so successful. This is in spite of the fact that large scale service employment clearly contradicts the spirit of labour laws for the industrial sector. Violating the spirit of this law has helped bring some 200 million people out of poverty.

Hugo,

Welfare gains can be made by circumventing laws in individual transactions as well -- e.g. fraud/theft, etc. Napster created huge welfare gains -- the loss of income to record companies was minor in comparison to the gains from making music accessible at its marginal cost of production. There are also enormous welfare gains to be had if debtors defaulted on their student loans, even though they willingly entered into these contracts. Stealing from the rich creates huge welfare gains. The same goes for ignoring patents on medicine so that poor people can get medicine. Enormous welfare gains there. I agree that people in general make very bad decisions.

If you believe that a given policy is wrong, but are unable to win in the marketplace of ideas, then that's a pretty good reason to believe that your ideas aren't so good. This is especially true in real estate.

If I live in a quiet building, that's valuable to me, but the quiet isn't valuable to me when I'm throwing a party. If I walk down a nice street with setbacks, this makes the street much more walkable and beautiful, which increases property values. For that reason I would want to build out to the property line in my own house, while preventing anyone else from doing the same. But if everyone builds out, the setbacks are gone, the street turns into a wind tunnel, and it stops being walkable and property values fall.

So people in their wisdom get together and decide that no one can build out to the property line, and everyone has to follow the same noise standards. If you don't like it, you can buy a house in a different area or a unit in a building with a different HOA. There are a great variety of local zoning laws, and you have a say in what your local laws are, but again, it's the marketplace of ideas.

All of your examples involve welfare gains in the short run but welfare losses in the long. If debtors default this will make lenders much less willing to lend in the future, at the very least they will demand far higher interest rates. The default means future students will have trouble taking loans and I believe almost everyone would agree that the net welfare effect is strongly negative. Similar with stealing from the rich, it creates a disincentive to earn money (kind of like a tax) and makes rich people spend far more on security which is very inefficient from a society point of view. In addition to lowering everyone's happiness by making them feel less secure. Napster is more complicated and may actually have been a good thing (possibly).

If Frances is correct about zoning laws then loosening them would have good effects both today and in the future.

As for "the marketplace of ideas", call it what it is - politics. And if you think the wisest ideas are always victorious in politics you probably haven't been watching the news lately.

I disagree. The problem is how do you know you are right in your pronouncements about the long run? The answer to all of these issues is "it depends". Some stealing from the rich is good. Some defaults are good. Some minimum wages are good. How much is the question. Neoliberal economics has been a dismal failure as well.

So let's not blur the issue between

1) should we use our pet economic theories to debate and argue for better policies, versus
2) is breaking laws a good thing because our pet economic theory says that the current policies are bad

Because you have a fundamental problem if you believe that

A) people understand the economy well enough to plan for their own retirement and make the right long term investments, and
B) are constantly making horrible mistakes in the voting booth when choosing which laws to live under

You cannot both argue for individual empowerment and also believe that you are smarter than the dumb masses.

Moreover when you advocate for cheating, you are making the political process less effective. Without cheating, when you vote for "no short term rentals", you are also denying yourself the right to rent your property out and that encourages you to weigh the pros and cons. With cheating, you are *more* likely to vote for no short term rentals if you think the law wont apply to you. You are *more* likely to vote for a higher minimum wage if you don't think that you'll have to pay the wage (but others will). So introducing ambiguity into whether laws will be followed makes the process of coordination much harder. It is an unmitigated bad. Already we know very little about how the economy works and so don't have a good understand of which laws are good or bad. Add to that a great deal of ambiguity as to when the laws will be followed, and you are making it even less likely for the correct outcome to be achieved.

So the correct solution for you is to condemn AirBnB but try to argue under what conditions zoning laws should be loosened.


"My view is that by far the most plausible source of fuss over Airbnb is a major industry that's strongly effected by it."

That's "affected."

You might want to have a look at resort communities like Whistler.

Residents do not want to live beside party central, so certain areas are monthly rental only. Airbnb would have you believe their 'disruptive' model is a boon to all... not so.

I find it interesting that so many commenters harsh on Airbnb for allowing hosts to avoid regulation, insurance, and taxes while praising Uber (which does the same). I actually object more to Uber, which pushes costs like deprecation onto its drivers while keeping the profits for themselves. Furthermore, most Uber drivers are not insured for commercial driving, and will find this out the hard way if they are ever in an accident while driving passengers.

Airbnb provides better service at a cheaper price than hotels, especially for families. It is also part of the problem in cities that don't have enough lower cost housing. I've seen some pushes to restrict whole apartment renting, while allowing shared room or private room renting (I think this is the rule in Berlin right now). That is a kind of interesting solution to the problem of removing large amounts of housing stock from the market, though I am not sure how they plan to actually enforce it.

JaneDoh - "I actually object more to Uber"

Another big difference between Airbnb and Uber is that hosts need Airbnb a lot less than drivers need Uber. I'm writing this in an Airbnb right near my in-laws place - a town I visit frequently. Now that I have the name and contact info of my hosts, it's very tempting to just cut Airbnb out of the transaction all together and rent from them directly. This is why Uber has a greater ability to shift costs onto drivers than Airbnb does.

I do think that insurance is an issue for Airbnb too - the room I'm in right now is what the British call a "loft conversion". There's a ridiculously steep staircase up to the room - I can't believe it would comply with any building code. I'm quite frankly worried that we could fall while taking our suitcases downstairs tomorrow morning. Don't like to think about the insurance issues! (Uber does provide insurance for its drivers while they have passengers in the car, and possibly at other times also - don't quote me on that later point).

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