Recently we interviewed a St. George resident who was warned by a city code enforcement officer that his house sharing attempts via the popular site Airbnb were in violation of an ordinance prohibiting short-term rentals. The Palmers were using Airbnb to rent the basement of their home to tourists in order to supplement their family’s income—an activity that yielded not a single complaint from anybody.
This crackdown highlights the strong arm of the regulatory state over a growing “sharing economy” which pits innovation, individual liberty, free enterprise, and private property rights against the regulatory “police power” of local government. This is reminiscent of recent actions in Utah to regulate popular ride-sharing apps Lyft and Uber, and innovative insurance broker Zenefits—except in this case the government is not just attempting to regulate commerce alone, but the very rights of an individual property owner.
In house-sharing arrangements, sites like Airbnb and VRBO match travelers with individual property owners who are willing to share all or part of their property with someone for a short period of time. In Utah you can find anything from someone’s air mattress for $10 per night to an entire luxurious ski lodge for thousands of dollars per night. Such a wide range of options do not exist in the commercial lodging market.
Private short-term rentals play an important role, as they cater to an underserved market segment. Many potential travelers feel constrained by a market where their options are limited to commercial hotel and motel rooms, which are often clustered in specific areas and lack the feel and warmth of a home environment. Commercial rooms are also usually priced within a specific consistent range, leaving few options for cost-conscience consumers. Additionally, most commercial options do not serve large groups and families very well; large groups might prefer an extended stay in a venue that permits cooking and other activities more akin to a home than a hotel. These are all features that the sharing economy can (and does!) provide.
The strength of a sharing economy is that there is diversity of choice for consumers at a variety of price points. The success of house sharing services to date reveals existing market inefficiencies created by regulation and central planning that have gone unnoticed. No commercial provider is offering air mattresses in someone’s spare bedroom for $10 per night. Too often we assume that the preferences of consumers are relatively homogenous and match the existing market supply. The principle of disruptive innovation reveals the fallacy of this short-sighted assumption. Steve Jobs articulated this idea well when talking about the development of the iMac. He explained that when developing an innovative new product, “a lot of times, people don’t know what they want until you show it to them.” In the case of short-term rentals, consumers did not realize they would like to rent a private person’s home until these sharing platforms showed how easy and beneficial it could be.
Of course, we didn’t need the internet to know that this was possible or useful. “Boarding-out” has been in practice for hundreds of years in this country. Many households in the nineteenth century took on boarders routinely to help pay the bills. Such an arrangement is efficient, as it takes advantage of unused space and can be particularly helpful to the real estate market by increasing the demand for homes. For example, a small but growing family may justify buying a five bedroom house, knowing they can rent out two of the rooms until they need the space at a later date. In this way, they can offset the cost of the larger house and avoid having to rent a smaller three bedroom apartment or move from a smaller starter home once their family has grown.
The sharing economy empowers individuals to participate in the marketplace as a sort of “micro-supplier” and not just as a consumer. This adds diversity to the market by giving consumers more choices, thereby creating efficiencies previously not possible because the transaction costs for a micro-supplier to find willing buyers was too high for any one micro-supplier. Innovative social pairing sites like Airbnb, VRBO, Lyft, and Uber bear the large upfront transaction costs of creating a platform to match these new micro-suppliers with willing consumers. The internet merely reveals the diverse suppliers and consumers and helps match them for a small fee.
Across Utah we have identified several cities that have specific regulations prohibiting short-term rentals; many more have used existing zoning restrictions to ban the practice of house sharing. The city councils of Moab, St. George, Park City, and Provo have each enacted ordinances prohibiting residents from renting their own properties to patrons. Interestingly, Park City makes an exception for residents in one specific subdivision; residents in the Prospector Village subdivision are welcome to host tourists, but those living elsewhere are not. We have also spoken to a number of individuals in other cities where code enforcement has cited zoning ordinances as the reason individuals in residential zones are not permitted to rent a portion of their house for a short-term (despite the city not having any ordinance that explicitly bans them). Utah is not unique; short-term rentals have faced opposition across the country including notable battles in New York City.
Regulation on short-term rentals, if regulated at all, should not differ significantly from regulations on long-term rentals and should not be instituted for the purpose of limiting the number of short-term rentals. Renting a home long-term does not change the property from residential to commercial, nor does a short-term stay turn the property into commercial use. The type of tenant does not change the structure or nature of the residence, and therefore should not change the zoning. A property that is rented for a short-term today may, at the discretion of the owner, be rented for a longer-term tomorrow.
Additionally, using zoning regulations to micromanage property use interferes with the fundamental right of use and enjoyment of property. It is our belief that such a practice is in fact unconstitutional and constitutes a regulatory taking. While zoning has been ruled constitutional by the Supreme Court in Euclid v. Ambler Realty as a reasonable extension of the police power to regulate nuisances, we feel that this prospective approach to control speculative potential nuisances that have not actually presented themselves runs counter to the principle of liberty. As readers learn in our interview with Mr. Palmer, existing nuisance regulations are sufficient because they apply equally to all citizens whether owners, guests, or tenants—and these ordinances are not dependent on the arrangement or length of the tenancy. If there is a noise or parking problem, then enforcement should address that nuisance instead of creating blanket rules infringing on the rights of innocent property owners in hopes of mitigating future potential (and infrequent) nuisances.
When weighing private property rights against the regulatory interests of the government, deference should always go to property rights. Government exists to protect these rights—rights whose conceptual existence pre-date the government itself. Zoning regulations turn this model on its head, arguing that property rights are in fact privileges granted by government. Once we have collectively transformed our rights into privileges granted by government, we have changed the form of government from one predicated on liberty, where government derives its power from a delegation by individuals, to a type of government where individuals are subordinate to, and serve the interests of, the state.
Creating regulations aimed at reducing the number of short-term rentals does not serve as a protection of the public or of any particular right of a neighbor. Rather, it reeks of protectionism and central planning with no substantive or legitimate public benefit. Cities in Utah should welcome the market efficiencies and economic development brought on by the innovations of the sharing economy, rather than bowing to the interests of incumbent industries using the complaint process to send enforcement officers after the upstart competitors.
The U.S. Conference of Mayors in 2012 voted unanimously in favor of a resolution that supports allowing short-term rentals in America’s cities as an economic development opportunity and proposed treating short-term rental tenants the same as long-term rental tenants. If Utah really cares about free enterprise and private property rights, it is important that cities get this right.