Photo by Alexander Mils on Unsplash
Airbnb is a lucrative service for landlords, capitalizing on short-term rentals and prices that are multiple times higher than rent. That being said, this investment strategy is only worsening the housing crisis while heightening the possibility of financial bubbles.
The U.S.-based company offers vacation rentals, homestays and tourism-related activities. The service is an online marketplace that takes a commission cut from sales that take place through their website and mobile app. Meanwhile, landlords using the service to advertise their property are realizing that they can sometimes make up to three to four times more by making rental units into by-night Airbnbs.
The ugly side of this can be seen in Brisbane, Australia where they, like Canada, are facing a housing crisis. There was a case this summer where a Brisbane landlord turned their nine rental units into Airbnbs, giving tenants — including families that had been living there for years — notice to prepare to leave.
The rental prices have shot up as a result of rentals being turned into overnight vacation stays in Brisbane, Canada and other countries that are location/vacation hot-spots, and understandably so. When the supply of rentals can’t meet the high demand for them, prices go up.
In Toronto, this has been an issue for years. In 2019 The Globe and Mail put out an article describing “ghost hotels”—units owned by commercial operators solely for Airbnb:
“Recent reports by the CBC have highlighted how some of these commercial operators operate country-wide networks of 200 or more apartments. Activist group Fairbnb estimates that within Toronto there are more than 6,500 homes and apartments operated by commercial hosts, who often have multiple units for rent. Airbnb often portrays its users as homeowners renting out spare rooms, but Fairbnb’s data suggests that commercial operators are close to 42 per cent of the platform’s hosts in Toronto and they generate more than 73 per cent of the company’s revenue in the city.”
There’s another side to the proliferation of Airbnb: the risk of creating market bubbles.
My partner and I went up to Sauble Beach during this past summer break. While in the Bruce Peninsula, we did an Airbnb experience at a farm. Our host told us that his concession has seen such an uptick in Airbnb services in the area that a law was passed through their town council that put a tax on Airbnb income. He then informed us that this tax fully funds the concession’s fire services.
A company based in San Francisco is fully funding fire services in a farming community on the other side of the continent; there’s no saying how much of this kind of reliance on Airbnb income for public utilities is going on around the world.
If that isn’t concerning because Airbnb “seems solid,” then just consider that there are now lenders selling risky mortgages with higher interest rates because borrower’s intend to turn them into vacation homes. The industry term for this is a “debt service coverage ratio” (DSCR) loan, and it’s making certain real estate brokers a fortune.
This may have a similar aroma to the subprime mortgage loans, mortgages with a high chance of default that were aggregated and sold as investments ostensibly as safe as treasury bonds, that helped fuel the 2008 financial crisis. They’re similar in that they appear solid while things are booming, however a bust cycle, depending on the size and reason of it, could make the whole thing go belly-up. In that case what happens to the fire services in the Bruce Peninsula funded by Airbnb taxes? Moreover, if governments finally take action against Airbnb’s grip on their housing markets, perhaps extending a mandate over short-term use as Singapore has done, these DSCR loans could default causing a burst in housing securities.
If this doesn’t happen then the scenario isn’t much sunnier; as housing crises worldwide are exacerbated by rentals transformed to an Airbnb structure, hopeful future homeowners of the middle class will be frugal as they bide their time and save, as will lower income renters who aren’t able to splurge on vacation stays as they are trying to pay the high rent costs month over month. This all could affect the boom of DSCR loans. If it doesn’t, it’s likely because wealthy people are vacationing all over the world and that mostly untaxed point-of-sale Airbnb money is going back into the pockets of commercial operators, vacation-based mortgage brokers and Silicon Valley.
The whole picture is clear: Airbnb is becoming a risky, lucrative tourism operation for the wealthy that harms local communities and further entrenches us in a deeply exclusive, financialized and liquidized global housing market.
Airbnb has been taken to many people out of the housing markets.
There should be a special tax treatment for Airbnb owners.
Very interesting article. First time I’ve heard of DSCR loans. But if they were able to survive Covid-19 when travel should’ve been at its worst, it’s unlikely a recession is going to make much of a dent in ppls travel continued desire to travel.