AirBnB, Scourge of Canada's Rental Markets
AirBnB, Scourge of Canada’s Rental Markets
My family owned a house that I lived in when I was young. It was a three family house. My grandma lived on the third floor in the smallest unit, my cousins lived on the second floor and my family lived on the first floor. Eventually we moved on but we never sold the house.
Over time it became a modest rental property. Grandma was still living there but so did one of my closest friends. He rented out the second floor apartment and they became an unlikely duo: a tiny Asian grandmother barely five foot tall and a 6 foot-plus lanky tech guy with dreadlocks who was my brother from another mother. He was very different but Grandma became fond of him.
My friend’s apartment was spartan. He barely had any furniture, aside from his computers, a card table and some chairs, a giant recycling bag filled with empty soda cans - soda was daily “fuel” - and an air-mattress. The rent was automatically sent via direct deposit and one time he even heroically shooed out a baby raccoon that had somehow crashed through the roof.
Nowadays families from Nepal, Thailand and Ecuador are living in that house. It has gone from being lived in by family, then by friends, and now, strangers. Over that time the length of stay has shrunk from decades down to years, and maybe it will go down to a few months at a time.
That’s happening at scale - much shorter stays as a service - in The Sharing Economy.
AirBnB started in 2007 with an air-mattress and a need to “make a few bucks” to help pay expensive San Francisco rent. A decade later, massive VC investments mixed with a good story morphed that air-mattress into a global business.
Air-mattresses! If only I figured that out I could have gotten some “series A” and more to become a startup magnate when my friend was still living as my Grandma’s de facto “roommate”.
Ah well…
Just like Uber and Lyft, AirBnB’s growth has caused a lot of friction. While I have relatives all over the world, about half my family lives in Canada, and sometimes family chit-chat gets my attention. And some of the family gossip is humble bragging by older relatives about their home values.
But lately, there’s grumbling by my cousins about the difficulty of finding a good rental. This is where AirBnB comes in. AirBnB has unexpectedly become a villain in what was already a tight rental market in Canada.
A tight Canadian rental market exists for a number of reasons:
Homes are still too expensive even after rate hikes and tighter federal mortgage rules that were enacted to cool a hot housing market
Many people have to rent because they can’t afford these still expensive homes
There is a lot of competition for rentals from immigrants
Not enough rental homes have been built in places where people want to live, especially in the big cities
It’s become harder to buy a house in Canada since 2017.
This was due to interest rate hikes in mid-2017 and the introduction of a federal mortgage stress test at the beginning of 2018 that disqualified many buyers.
The hikes and tighter mortgages were done to cool what was an overheated housing market. But the adverse side-effect is that it's now actually harder to buy a house.
According to the 2019 RE/MAX Housing Market Outlook Omnibus Survey, 36 per cent of Canadians are considering buying a home in the next five years, down from 48 per cent in 2018. RE/MAX blames the drop in interest on the mortgage stress test and rising interest rates, both of which are eating into the purchasing power of buyers.
You would think that lower prices would be great for Canadians in search of a home. Lower prices means more homes right?
Nope.
They’re still too expensive. So people have to rent. And there is a lot of competition for rentals.
Rental demand has increased for a number of reasons including increased immigration over the last few years.
Canada has taken in 300,000+ thousand immigrants annually since the immigration rules were liberalized in 2015. This is the largest number since 1910.
The national vacancy rate in Canada has dropped to 2.4% which is low by international standards. The Global Property Guide via the Canadian Mortgage and Housing Corporation (CMHC) report of the national vacancy rate’s decline confirms the rental market squeeze.
The national vacancy rate was 2.4% in 2018, down from 3% in 2017, 3.7% in 2016 and 3.5% in 2015, according to the CMHC. It is considered very low by international standards. Because of skyrocketing house prices in recent years, an increasing number of Canadians have no choice but to rent.
There has been an increase in rental construction but it’s too slow and not enough for current demand, especially in big cities like Toronto where they’re needed the most.
Now with a tight rental market, Airbnb has made things even worse.
AirBnB has vacuumed up most of the spare rental supply in Canada’s big cities when the demand-supply imbalance was already tight:
Airbnb couldhave sapped as many as 31,000 units out of Canada’s rental market in the last year — enough to represent a drag of as much as one percentage point on vacancy rates in each of the country’s three biggest cities.
That’s close to the total rental vacancy rate in each city, as reported by the Canada Mortgage and Housing Corporation (CMHC).
And it’s a problem that appears to be growing, according to a paper out of McGill University’s School of Urban Planning.
“Through removing housing that would otherwise be available on the long-term rental market, Airbnb is reducing housing supply and, in turn, housing affordability,” researchers found.”
AirBnB might be great for property owners like my aunts and uncles who want to squeeze some money out of the homes they own, but it’s squeezing my cousins out of rentals they can afford.
More rentals are being built but that takes time. For now the squeeze is on.
My guess is that the government will be encouraged to put the squeeze on AirBnB as part of a broader push to increase rental housing supply. The company will likely fight back.
I mean if I were running a successful business, I wouldn’t just rollover and back off from a huge market opportunity. And at the same time, if I was a government with strong social programs, I wouldn’t let a private tech startup squeeze my country’s housing market.
There’s trouble coming. Public sentiment has shifted and tech giants and unicorn startups are under scrutiny.
If you’re a Canadian land-lord then you’re doing well, and it could be quite a while before rental supply catches up with so much demand pressure. If you’re AirBnB, you’re gonna be hustling to make sure you don’t lose a nice rental market situation. And at the same time you’ll be trying to find ways to be portrayed as a good guy who’s helping home-owners.
I wonder if we will end up going full-circle in some markets? Will an anti-sharing business model? Is what’s happening in Canada going to be a test-case for AirBnB’s ambitions?