Fines, regulations and another tragedy of the commons
News of the €600,000 fine imposed on Airbnb and HomeAway by Barcelona City Hall, adding to this summer’s previous €30,000 sanction, highlights the problems arising from a failure to adapt to the reality of lower the transaction and coordination costs created by the popularization of the internet.
Platforms like Airbnb or HomeAway are only possible thanks to the internet. Before the internet, people who wanted to rent out a room or their entire property would typically place advertisements in the press or even wait at train or bus stations on the look out for backpackers, equally, those looking for accommodation would sometimes choose somewhere on the recommendation of friends.
In the vast majority of cases these activities took place in the shadow economy, and were unregulated: they were difficult to detect, unless neighbors complained.
Contrary to what many people seem to think, platforms like Airbnb not only help this activity grow, but also to regulate it. I’m fed up hearing ignorant journalists and others talk about Airbnb and HomeAway as though it were part of the submerged economy. When we rent a property through such platforms, the entire operation is carefully registered, meaning the relevant authorities can scrutinize the records. These platforms do not operate in the submerged economy; they introduce transparency to the activity for the first time. A number of cities work with Airbnb, for example, requesting the details of their operations so as to apply the corresponding taxes to the income obtained by property owners.
Barcelona is one of the most popular Airbnb destinations, with the sixth highest number of properties for rent anywhere. In July 2016, using Airbnb data, Forbes said the company had 23,000 properties from entire homes to shared rooms in Barcelona, although today the Airbnb page lists exactly 14,855. The effects of Airbnb’s activity on the Barcelona real estate market are obvious: the law of supply and demand means the best way to make money from a property in the city is to put it up for short-term rental during the holiday season, which has led many owners to fill their properties with beds and to host a type of tourism that undoubtedly creates tensions with neighbors.
Barcelona City Hall says renting out a property for short-term stays generates 2.3 to 4 times more income than a conventional rental, with profits of between 7% and 13% compared to 3% or 4% .
Airbnb has generated a resource that many people want to exploit, maximizing profits at any cost, producing a classic example of what in economics is known as the tragedy of the commons: a situation in which several individuals, motivated only by personal interest and acting independently but rationally, end up destroying a limited resource. The way to confront the tragedy of the commons has historically been by regulating access to the resource, which in this case is undoubtedly complex and requires careful consideration.
Barcelona City Hall accuses Airbnb and HomeAway of offering illegal accommodation, but its argument is based on a flawed premise. Renting out a property without a license isn’t an activity that takes place in the shadow economy: if people are not declaring the income on the properties they rent out, that is not the responsibility of the platforms, but of the property owners and the city authorities for not using the means available to them to stop such activities.
The problem is that it is currently impossible to get a license: there has been a moratorium on them for more than two and a half years. At present it is estimated that there are 15,881 tourist apartments in Barcelona, of which 9,606 are licensed and 6,275 that aren’t, which means almost 40% of properties on offer are currently unlicensed. This situation is simply absurd and unsustainable, and requires an immediate solution: the problem lies not with the rental platforms, but with a council that is refusing to budge. There is clearly demand for short-term rentals and trying to keep a lid on it is only going to create more problems. And such demand is not just backpackers and cheap tourists: the average price per night in Airbnb is $150, and there are even some thirty properties listed above $500 per night, including fancy apartments, luxury villas with swimming pool and amazing views, and even whole cruises in the Olympic Port.
To control the activity, by working closely with the platforms offering tourism rentals, it is possible to impose regulations on property owners — provided they are not excessively restrictive, meaning they can be pursued when they breach those regulations. The solution is not to tell platforms to exclude property owners without licenses they cannot obtain even if they wanted to, but to properly regulate the market to respond to the current supply and demand.
Things are not going to be fixed by imposing flawed markets, because those flawed markets become the source of the problem. The problem of the unregulated increase in the number of tourist apartments cannot come from fines, fines and demonizing platforms such as Airbnb and HomeAway, but through dialogue that seeks a balance between the freedom of those who want to obtain extra income by renting out a property or a room and the appropriate regulations to prevent that activity from annoying other residents.
So far, Barcelona City Hall’s approach has been based on a mistaken premise and is simply trying to stop an unstoppable phenomenon that is taking place everywhere in the world, generating wealth and very good experiences for many users. Being the city most resistant to progress or that imposes the highest fine is a very sad honor indeed.
(En español, aquí)
