Why Existing Regulatory Frameworks Fail in the Short-term Rental Market: Exploring the Role of Regulatory Fractures
With historical roots in the once-common practices of lodging and boarding, short-term rentals (STRs) have become in recent years a prominent feature of the global travel accommodation space. Worth roughly US$40 billion in 2010, the global value of the STR market reached US$115 billion in 2019. Despite a significant hit on business as a result of the COVID-19 pandemic, the STR market is showing strong signs of rebounding. The increased popularity and accessibility of the STR market can be largely attributed to the emergence of digital sharing economy platforms, such as Airbnb and Vrbo, which play the role of mediator in simplifying interactions and transactions between hosts and guests from around the world.
As this platform-facilitated STR market has grown, home sharing has garnered increasing attention. Many have celebrated such innovation in the hospitality sector for the benefits it has delivered, among them lower prices, increased consumer choice, local economic development, community revitalisation, and a reliable income stream for property owners. However, others have been quick to decry the practice, accusing STR platforms of engaging in anti-competitive behaviour, exacerbating issues of over-tourism and a lack of affordable housing, and undermining the habitability of communities. Of notable concern among many STR skeptics is a potential shift in practice away from individual hosts renting a primary residence or space therein, and towards commercialization, whereby corporate entities are buying up what were once residential properties to list in the more lucrative STR market.
The above picture of costs and benefits points to a market that is rife with tensions. Naturally, this reality has produced calls for regulation and government involvement, and in some cases, has even fuelled campaigns for all-out ban of the practice.
As governments have stepped into the regulatory fold, however, they have faced significant challenges. This is because STR activity, different in composition and dynamics from that which plays out in traditional markets, pushes conventional policy boundaries, undermining in some cases the effectiveness of standard legal, regulatory, planning, and governance processes. Regulatory struggles can be attributed to three key factors.
First, most conceptions of home sharing employed in the regulatory space treat the STR market as conventional and thus two-sided; that is, as encompassing interactions between those supplying the service (hosts) and those accessing it (guests). Such understandings fail to capture the involvement of additional players—digital STR platforms, most notably, but more recently professional property managers as well— not to mention the nature, extent, and implications of their involvement. Importantly, STR platforms are more than passive facilitators of market activity, and not only influence the contours and dynamics of the market, but also actively shape the regulatory space.
Second, attempts to regulate home sharing have been hampered by the widespread tendency, within both policy and academic circles, to treat the market as a monolith. Yet, an assessment of drivers of participation and dynamics among guests, hosts, and platforms makes manifest the complexity of the STR market and the diversity of activity that plays out within it. Notably, STR hosting spans a spectrum of activity, from low- or no-fee home sharing in the spirit of collaborative consumption, to renting a suite in a primary residence, to the commercial multi-hosting referenced above. Drivers of guest participation in the market are similarly diverse. Far from passive, platform involvement is shaped by the desire to create and benefit from network effects, and thus spans partnership development, bridging to distinct but related markets, and even the pursuit of socially minded or philanthropic endeavours. The above diversity suggests that one-size-fits-all approaches to management are destined to fail.
Third, governments and policymakers have relied on traditional regulatory concepts and parlance, such as the notion of regulatory violation, to characterize various forms of STR market activity. However, in the case of platform-mediated home sharing, the concept of regulatory fractures—instances in which new modes of activity do not map well onto existing frameworks, thus disrupting regulatory effectiveness—is more apt. The conceptual frame of regulatory fractures enables one to uncover the tensions and complications that are produced when novel activity arises within the context of longstanding institutions and processes, and underscores the extent to which reimagined regulatory and policy approaches, tailored to the unique features of the STR market, are vital. Further, if not addressed, regulatory fractures will not only undercut the intent and effectiveness of regulation but will also curtail the potential benefits of home sharing activity.
Going forward, successful management of the STR market will hinge on the ability of policymakers to confront the factors currently hindering the effectiveness of policy and regulatory approaches, namely an under-developed understanding of the STR market and its dynamics, and a continued use of tools ill-suited to novel economic activity. Fortunately, governments ready to innovate in the regulatory space and reimagine management strategies will learn that a number of less conventional approaches show promise.
Among such emerging approaches is co-regulation, a tactic employed with success throughout the European Union in particular. Given their prominent role in the market, as well as their desire to influence regulation to maintain network dominance, platforms could make willing and effective partners in co-regulation, just as some other industries are entrusted with a degree of self-regulation. Though it would require the development of a robust framework to ensure effectiveness, co-regulation could help governments to overcome existing issues, such as those related to compliance and enforcement, while also enabling access to more comprehensive data, without which tailored policy and regulatory solutions are significantly hampered.
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