25 Oct 2016 16:14 IST

When corrupt governments restrict competition

Supporters of Airbnb stand during a rally before a hearing called "Short Term Rentals: Stimulating the Economy or Destabilizing Neighborhoods?" in New York | Reuters

Move to restrict Airbnb in New York will mean families losing out on income earned from rentals

As an avid fan of the shared economy, I was shocked to learn this week that the State of New York dealt a body blow to Airbnb, the innovative provider of home rentals all over the world. New York City is the company’s largest market in the US.

Using the vast powers vested in it to make law, the State government decided, in its wisdom, that Airbnb rentals “Compromise efforts to maintain and promote affordable housing by allowing those units to be used as unregulated hotels.”

Shared economy

Airbnb has been a pillar of the shared economy, along with Uber. Economists love the value these companies bring because unused resources are efficiently unlocked, vastly increasing supply and bringing prices down with little or no additional capital investment.

The problem is that the additional supply is a direct threat to established and entrenched businesses, which resort to greasing the palms of the powers that be to persuade action favouring them instead. It is a parlour game, in which the common citizen stands little chance of winning.

An anecdote

Airbnb is an amazing company. In January, I was scheduled to spend five nights in Pune, to attend a conference at the College of Engineering. Hotel room rates on major travel websites were listing for upwards of ₹3,500 a night, and some of these were 10-12 kms away.

I turned to Airbnb (as I often do) and found a nice room for rent with a family which owned a 3-BR flat, literally 10 minutes away by walk. Further, the home was close to restaurants and shops, so I did not have to worry about finding local transportation each time I wanted to step out. The price? Just ₹1,400 a night.

Personal verification

To get the room, I had to provide my credentials to the family in advance, including writing a short note as to why I needed the place. The family was easily able to verify my authenticity because of the digital footprints we all tend to leave these days (Facebook, Twitter, the web). I was communicating back and forth with the family over the next few days, exchanging multiple messages about my trip.

The trust factor was so high that the evening I arrived from the train station, the members of the family were all out at a party. They had left the keys to their entire flat with the security guard downstairs, with a couple of Whatsapp messages directing me to the room I would be staying in.

I let myself into the flat, found my room and shut the door. The room itself was big and comfortable, dotted with the family’s priceless belongings. Photos on the wall at various locations told me that they like to travel around the world. The bookcase contained a good selection of books and by the titles, I could learn more about the family’s interests. I picked a book on Buddhism and settled in to rest for the night.

It was only in the morning that I met the lady of the home and her adult son, both having coffee at the breakfast table. My own coffee and breakfast were waiting — and I ended up spending a good 30 minutes getting to know the family and the area. I felt like I was visiting a long-lost friend at his home, rather than as a guest at an impersonal business.

Expanding camaraderie

In a city like New York, which attracts millions of visitors around the year, Airbnb rentals have helped expand the unspoken camaraderie that exists between a city’s residents and its guests. Landlords proudly reveal tips about their neighbourhood to the guests: an inexpensive but high quality eatery; the convenience of a bus or train stop. Guests extend invitations to the landlords to visit them when they themselves travel. Sometimes, landlords and guests become friends for life.

The huge price-gouging hotel industry has no offering that comes even close.

But what the industry does have is power. It makes regular campaign contributions to elected officials who have the exclusive right to legislate. Under threat from the additional supply of hundreds of thousands of rooms from Airbnb families, the industry’s lawyers found an obscure loophole in New York City law: that no homeowner can sublet a room for periods fewer than 30 days. Originally intended to protect communities from the ill effects of prostitution, this loophole was exploited by the industry to push a complete ban on all Airbnb rentals.

Revenue loss

The new law allows local governments in the State to fine hosts up to $7,500 even if they are caught listing a property on a rental platform such as Airbnb. Minutes after the measure was signed into law by the State’s governor, Airbnb filed a suit in the US court, claiming “irreparable harm”. Time alone will tell how this will all play out.

With the ban, thousands of families have immediately lost out on marginal income earned from rentals. The city’s hosts generated about $1 billion in revenue last year — a huge amount.

Imagine if such a ban were to be imposed on the Pune family. Even if they rent their spare room for only 15 days a month (50 per cent occupation), that is still ₹21,000 of extra income — money that can make a dent in their EMI payments for the flat, for the family car or to send a child to college. In New York City, one of the most expensive cities in the world, even a small loss of additional income can be devastating for host families.

The huge reduction of supply of rooms means that your next trip to New York City and other cities in the State will be a lot dearer. Just visit the boardroom of a hotel company this week: you will see uncorked champagne bottles everywhere.

It was President Lincoln who said, during his Gettysburg address, that “Government of the people, by the people, for the people, shall not perish from the earth.” Were he to look down on the state of democracy in New York today, he would be stunned.

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