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Friday, November 6, 2015

Government, Not Airbnb, Is Why Rent Is Outrageous

Restricting housing options hurts the poor

“The rent is too damn high!”

Airbnb is the new target of this familiar complaint from residents and politicians of major cities throughout the United States. The spurious claim is that Airbnb, an online service that connects people with spare space with those who need a place to stay, raises the price and reduces the overall supply of housing. Therefore, critics say, regulating Airbnb will prevent long-term housing areas from resembling hotel or apartment districts, resulting in a more affordable housing environment.

Although the call to fix housing shortages is welcome, the real culprit of high rents is local governments — not Airbnb.

Specifically, housing shortages in many cities, including  San Francisco and Los Angeles, were caused and perpetuated by city governments’ unwillingness to increase their housing supply.

Take California, for instance, where the problems are most obvious. Since the 1960s, the residential construction rate in California has significantly declined and, as a result, real housing prices increased by 385 percent from 1970 to 2010. Though limits on new construction are not the sole cause for increasing housing prices, they are a major factor.

The least affordable housing markets are those where new housing permits have not kept up with population growth. For example, in Los Angeles, there were 28,000 housing projects started in 2014. Meanwhile, Houston, a city with no housing shortage and 1.7 million fewer people than Los Angeles, started 64,000 housing projects in 2014. This lack of housing is not due to overcrowding — Los Angeles has roughly 8,000 people per square mile, which is one-third of New York City’s level.

San Francisco, where rents for a one bedroom apartment frequently exceed $4,000 per month, has the most serious housing shortage in America. Over the past 20 years, San Francisco only permitted the construction of an annual average of 1,500 housing units. Over that time, San Francisco’s population grew by 97,000. From 2010 to 2013 it grew by 32,000.

According to a Trulia study that examined housing production from 1990 to 2013, San Francisco had the highest median prices per square foot and the lowest rate of new construction permits among America’s ten largest tech hubs.

Nearly 80 percent of San Francisco’s housing is occupied by rent-controlled tenants or homeowners. This leaves only one in five housing units available for other renters,  artificially driving up rents.

Additionally, the booming, high-salary tech industry represents about 8 percent of the workforce in San Francisco, putting further upward pressure on the price of housing in an already overburdened market. This is why some blame tech workers for the city’s housing shortage. Their solution is for tech companies, such as Google, to create more housing for employees on company property. Although this seems to be a logical proposal, the city of San Francisco explicitly forbids it.

San Francisco, unlike many other major U.S. cities, has building permits that are discretionary rather than as-of-right. This standard makes it more difficult to gain approval for development. For new housing developments in San Francisco, there is a preliminary review, which takes six months. Then there is a chance that neighbors will appeal the permit on either entitlement or environmental bases. These barriers add unpredictable costs and years of delays for developers, the costs of which are ultimately passed on to buyers and renters.

If there is an actual shortage of long-term housing, then it is necessary to allow housing permits to meet this demand, but local California governments stand in the way.

It is easy for politicians to blame corporations for problems for which politicians are ultimately responsible. This is precisely what California Senator Dianne Feinstein is doing. She recently published an article in the San Francisco Chronicle arguing in favor of the city’s Proposition F, which would limit short-term rentals to 75 days a year.

According to Feinstein, this ballot initiative would help alleviate the city’s housing shortage. Predictably, Feinstein does not mention the lack of housing permits in cities across her state. When evaluating Feinstein’s arguments, it is important to note that she and her husband have a stake worth up to $25 million in a San Francisco hotel.

Hotel owners across the country have been some of the strongest critics of Airbnb and the increased competition that it brings to their industry, and the Senator’s stake in the hotel might have something to do with her opposition to Airbnb. After all, if Airbnb’s growth continues to accelerate, hotels will have to lower their prices to stay competitive. Consumers and local residents benefit from this innovation and competition, but hotel owners—who often face high taxes and burdensome restrictions — lose.

Rather than being part of the housing shortage problem, Airbnb has been part of the solution. Thanks to Airbnb, there are thousands of new listings of rental homes that would not have otherwise been conveniently available. This increases the housing supply for both short- and long-term renters.

Airbnb might owe its existence to San Francisco’s housing shortage. In 2007, the city did not have enough hotel capacity to house visitors for an industrial design conference, so the eventual founders decided to start a company to fix this problem.

In Los Angeles, homeowners spend on average 40 percent of their income on mortgage payments while San Francisco residents spend on average 48 percent. Airbnb provides an opportunity for these homeowners to meet their mortgage obligations by helping them rent out spare rooms.

Housing shortages have been going on for years, if not decades, in many urban cities. Airbnb has only been around since 2008, and only started experiencing rapid growth in 2012—long after the uptick in housing shortages began in major California cities.

Additionally, Airbnb has a few thousand listings in these cities, a tiny fraction of the overall housing market. New York City, which is the most popular Airbnb market in the United States, has 33,000 total listings in all five boroughs. By comparison, there are 850,000 apartments in Manhattan alone.

Airbnb helps to relieve some of the symptoms of high rents and housing shortages by providing a larger supply of housing accommodations and offering existing homeowners some relief from their existing mortgages. Instead of falsely placing blame on Airbnb for housing shortages, politicians should embrace the service and evaluate their destructive restrictions on new housing development.

Cross posted from e21, a project of the Manhattan Institute.

  • Jared Meyer is a fellow at the Manhattan Institute for Policy Research. His research has been published in The Wall Street Journal and National Review.

  • James Delmore is a contributor to e21.