Airbnb is expanding. Who knew it 3 years ago? A few. Who knows Airbnb today? Almost everybody. Even this one characteristic, it is enough for someone to say that Airbnb is a potential bubble. But here, I will not talk about ‘theories’ but I’ll talk about practical conditions, which combined, can cause the burst of Airbnb bubble; small or big, only time will tell.
1. As Airbnb is becoming more known, attracts people that want ‘easy money’. Sure, we can also find people in Airbnb, that do a good work, but the fast growth of a platform that creates income, and indeed a good one and till today, basically tax free, leads to ‘easy money’; and whatever seems that can give ‘easy money’, attracts people that want to make a profit, quick and with minimum effort. The increase of those bad hosts, will gradually reduce the pleasure of visitors using the platform.
2. Initially, until today and as a rule, Airbnb is used, because it offers lower prices to the visitors of any place. Airbnb’s initial growth, based on the fact that its users’ main incentive was to find some accommodation, at a price lower than a hotel room. But now:
• The costs for the people that engaged seriously as hosts, increasing, because Airbnb is starting to be regulated, globally; and of course, this regulation, increasing the costs.
3. Airbnb commits a kind of unfair competition against the formal hotel sector. The formal hotel sector, is paying taxes (direct and indirect), has employment costs and social security costs. Airbnb has not in the same level, the same costs, so the competition between Hotels and Airbnb hosts, is not equal, that’s why we can talk about unfair competition. But the formal hotel business sector is pressing the governments (all over the world) to regulate short term rentals and consequently, the operation of platforms such as Airbnb.
Governments and tax Authorities (all over the world) apart the pressures they accept (from hotel sector), they have incentive to regulate short-term rentals like Airbnb, because thus, they will earn taxes from a field that till today is almost ‘untouchable’. Which Government or Tax Authority, doesn’t want this?
Governments with the power they have, they will regulate the market of short-term rentals such us Airbnb, will make laws and will put taxes. It is sure. Airbnb as a company, may want to delay this development by avoiding to give taxation information to Tax Authorities, about the income of its users, but sooner or later, will comply with the law, and will give the data. This, will make Airbnb less attractive, especially to those hosts, that have a small profit.
4. Airbnb’s activity, with its rapid expansion to date, creates bubble conditions in the property market, with economic and social complications. In the areas where Airbnb is developing rapidly, which are basically areas of tourist interest, the prices of properties are skyrocketing. We have a recent example of Mallorca, capital of Mediterranean tourist destination the Balearic Islands, that voted on April 2018, to ban almost all short-term rentals of private homes like those on Airbnb, which locals say have triggered sharp rises in rental prices. With these measures, the local government wants to protect the permanent inhabitants of the city, in order to find an affordable (long-term) rent.
Be sure that Mallorca will not be the only one region, where protective measures will be applied.
Furthermore, governments in many Countries, impose time limitations for short-term rentals like Airbnb, such as up to 90 days per year limit, and there are strict and very high fines for the violators (hosts that short-rent their apartments for more days).
5. There are many people around the globe that try, as visitors, and just out of curiosity, the services of Airbnb (and thus, they help Airbnb’s expansion). Yes, there are people of high income that could easily stay in luxury 5-star Hotel Suite, but they prefer to stay in a good Airbnb room, just out of curiosity; they want to try something expanding and trendy like Airbnb. It’s sure that the apartments they choose, are good ones, with plenty of space, nice decorated and well equipment and their price, it’s a little bit lower than a luxury hotel suite. However whatever the Airbnb apartments offer more on space and equipment aspect, they cannot offer the extra services that a 4 or 5-star hotel can offer, such as Concierge (a 24-hour reception desk that can help at any time and for any need, its guests), gym, meeting room, restaurant, etc.
I think that high income guests/visitors, will try for some time the new and trendy Airbnb, and some time later, and sooner or later, will turn back to Hotels, because those, have the needed infrastructure and staff, to offer more and better services, and even if their rooms are smaller in square meters, comparable to Airbnb apartments.
6. Over time, other platforms will be create and be operate, more ‘clever’ and will compete Airbnb: an example is Couchsurfing, where someone can stay for free on a couch or emerging platforms of home exchange where someone can exchange home, for free. Those new and possibly more ‘smart’ platforms that will emerge, will remove a share from Airbnb platform, and I expect to remove, mainly visitors who want basically low costs.
In the field of competition, we should take into account that blockchain technology and digital currencies, could damage Airbnb, if a ‘smart’ platform based on blockchain were created, it would have zero costs for its users, comparable to high commissions paid on Airbnb or Booking. This, though it does not exist today, could develop in the future and remove rapidly and dangerously the two key-factors for the success of Airbnb, who are hosts and guests.
>>> Now, think of the combination of all the above, and imagine how this could affect Airbnb’s shrinkage, that seems inevitable; I just don’t know the intensity of the contraction and the exact timing will start happening.
Panayotis Sofianopoulos
Economist
Author of
HERETIC INVESTOR
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