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Regulators reining in short-term rental industry must find balance between innovation and compliance

Rapid technological advances that have made it easier for buyers and sellers to transact directly have disrupted numerous industries and unlocked massive untapped economic potential in recent years.

But they have also unleashed a wave of problems that regulators, who have largely been left to play catch-up, are now being forced to grapple with.

Airbnb, the short-term rental platform, has been a prime example. While it has been a boon for those with property to rent, neighbours and others living near short-term rentals had their lives disrupted by noise, litter and damage to property.

At the same time, housing advocates have argued that short-term rentals (STR) are contributing to the worsening of the rental housing shortage in large cities where rents are climbing, and vacancy rates have remained persistently low. The STR units, they argue, could be part of the long-term rental supply.

Municipal regulators have now turned their efforts to reining in the STR market, in which Airbnb is the most prominent of dozens of players.

Municipal authorities in Toronto and Vancouver are leading the charge for regulating STR in Canada. These cities are motivated to limit the loss of units to STR that may otherwise be available for long-term renting. Toronto is phasing in regulations starting in 2020 and expects thousands of STR units to return to the rental market.

The new regulations restrict STR to principal residences, meaning that investment properties cannot be used as STRs. Homeowners and renters are allowed to rent up to three bedrooms in a dwelling for an unlimited number of nights in a year provided a single booking must be of less than 28 consecutive days. An entire home may not be rented for more than 180 nights in a year.

The STR operators must register with the city for an annual fee of $50. Also, they must pay a four per cent municipal accommodation tax on all transactions. STR companies such as Airbnb must pay a one-time application fee of $5,000 and subsequently pay $1 per night for bookings through their platform.

Enforcing new regulations could also be a challenge. Essentially, Airbnb, and others like it, are digital exchanges. Monitoring such digital enterprises will require data-savvy digital tools.

Already, companies such as Seattle-based Host Compliance are offering their services to municipalities to assist regulators with enforcement. The company is already working with 300 cities in North America, including 23 in Canada.

Host Compliance, and others like it, use web-crawling tools to document listings and then cross-check against municipal licensing records to determine whether the hosts are following local regulations. Those found guilty receive a letter on the municipal letterhead with a screenshot of their listing.

(Interestingly, some Airbnb hosts in Kingston, Ont., objected to the use of an American firm to “spy” on them. The hosts were not as concerned about listing their properties on Airbnb, which is also a U.S.-based firm.)

While residents of freehold properties may not be able to restrict how neighbouring properties are used, those living in condominiums have some muscle to flex. Condominium corporations, regulated mostly by provincial acts, can define or restrict specific uses within the building. In Toronto, for instance, condominium bylaws have been amended to introduce minimum rental periods of one or six months. A high-end residential building in downtown Toronto fined a violator $5,000 for not adhering to the bylaws.

Regulating STR has been a challenge across the globe. Regulators from Christchurch to St. Louis are struggling to determine the scale and scope of regulations. If regulations are too restrictive, they will pre-empt innovation in and disruption to a business model that has not evolved over centuries. If they are too lax, consumers and the larger public might be adversely affected.

Rooming houses may still be able to operate under the new regulations. In Toronto, the regulation restricts up to three rooms in a dwelling, but not the number of renters per room. Already, complaints about rooming houses with bunk beds listed on Airbnb have attracted the attention of regulators. Plugging all loopholes might also be too expensive to implement.

The fact that San Francisco-based Airbnb is now operating across the globe poses new challenges for regulations. Who should regulate an international company that facilitates local services is subject to debate and legal interventions.

Airbnb caught a break in Europe when European judges in December 2019 exempted it from the property agent regulations. Recently, Airbnb has written to EU commissioners asking for “a single European body for digital services.” Pleading and negotiating with thousands of municipal regulators individually could limit digital enterprises (exchanges) from growing and achieving scale.

However, the call for a single regulator might not fly because no two cities are alike. What may satisfy regulators and neighbours in one jurisdiction may not be enough in another place. Hence, the demand for municipal oversight with spatially flexible regulations has been gaining momentum globally.

Shutting the door on innovative products and services is not the way forward. At the same time, safeguarding the city’s long-term housing affordability goals and preventing neighbours’ rights must also be a regulatory priority.

The key is finding the balance between innovation and compliance.


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