In today’s Finshots, we see why Airbnb’s founder thinks the company’s foundations might be broken.

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The Story

A year ago, many people were predicting the imminent collapse of Airbnb. Reddit forums and Twitter were calling it the “Airbnbust”. And the rumour was that the occupancy rates on the short-term housing rental platform had dropped like a rock. That no one wanted to stay in an Airbnb anymore.

But a year later, its shares are up 14%. It all turned out to be just a rumour.

Okay. Maybe it wasn’t all just a rumour. Maybe there was some truth to it. Because a couple of days ago Airbnb’s CEO Brian Chesky acknowledged that it’s a fundamentally broken business. So what’s going on, you ask?

Let’s take it from the top.

In 2007, Brian Chesky and Joe Gebbia were two broke kids who were struggling to pay rent for their apartment in San Fransico. That’s when they noticed that there was a design conference in town and all the hotels were booked solid. Attendees were struggling to find a place to crash. So they simply decided to rent out air mattresses in their apartment and called it “Air Bed and Breakfast.”

And that was the original premise or the foundation of the platform. If you had a spare room in your house in the city, you could rent it out. The rates would be cheaper than a hotel. You’d make a quick buck. And the guest would get to maybe spend time with a local who’d give some handy tips for the city. It was cosy and casual.

Users loved it. Investors slowly warmed up to it. Hosts who let out their apartments were over the moon with the extra money they were making.

But this massive love — especially from the hosts —  is also what eventually led to the “Airbnbbust” rumour. What do we mean?

Well, it was a simple oversupply problem. You see, during the pandemic, a lot of people bought a second home. Interest rates were at decadal lows and loans came easy. So people thought there was an opportunity to snap up a home and list it on Airbnb. Make some extra cash. For instance, the number of short-term rental listings in the US skyrocketed to 1.38 million in September 2022. That’s 23% higher than the same period a year ago. Suddenly, the number of listings shot up and there seemed to be a massive drop in overall demand for some hosts.

But the truth of the matter was that users were now spoilt for choice. They had more properties to compare and make a decision. And naturally, some properties fell behind.

Also, as per some analysts, many of those properties that showed a dip in occupancy were in rural areas and beach towns — places that were hugely popular in the midst of a pandemic when people wanted to get away from the crowds. But travel shifted back towards city getaways and those Airbnbs started seeing higher occupancy levels instead.

So yeah, it wasn’t a bust at all.

Alright, now that we’ve cleared that bit up, you will be wondering — why on earth is Brian Chesky speaking about a broken model?

Well, the thing is Airbnb has some dark clouds looming overhead right now. You see, its success actually created a whole new breed of homebuyers. Ones that just wanted quick rental income. Or rather “the short-term rental speculator.” These people believed that no price was too much to pay for owning a home that could be listed on Airbnb. Maybe they were drawn by all those YouTube videos touting “Make $100,000 from your Airbnb”, we don’t know. But as they started snapping up properties, it led to massive surges in real estate prices across the US. By December 2022 only 10% of new homes cost less than $300,000 as against about 40% in December 2019. A study also found that if the number of Airbnbs in the vicinity were doubled, the sale price of New York City homes would go up by 6-9%. But it wasn’t just that, the Airbnb phenomenon also meant that the number of homes in the market available for long-term rentals dwindled. This forced rental costs up for people who didn’t own homes too.

It was a double-whammy — rising real estate prices and rising rentals.

And cities are taking notice of this menace.

New York is doubling down on a rule which says that if a homeowner rents out their space for less than 30 days, they have to be living on the premises too. They want these Airbnbs to register and since most of them don’t meet this requirement, over 15,000 properties have disappeared from the platform. Florence, one of Italy's most popular tourist destinations, recently banned new short-term rentals on platforms like Airbnb so that it could free up more homes for locals. And Vienna, the capital of Austria, has a monthly tax Airbnb hosts have to pay if they make money from short-term rentals.

You can see how as more and more cities wake up to the Airbnb problem, it could potentially hurt the revenues quite a bit, no?

But there might be a bigger problem that Chesky has to deal with. And it’s that users of Airbnb are getting disillusioned. They hate the terms and conditions and the high prices — which often include an exorbitant cleaning fee which shows up only when you’re about to hit ‘book’. Just type Airbnb on X (formerly Twitter) and look at the results. Most of them will be complaints. Many people say they prefer hotels these days.

Now the Airbnb team is already trying to make pricing more transparent to users. But the one thing out of their control is how the host chooses to price the property. And as Bloomberg puts it, “Chesky walks a delicate tightrope as he tries to motivate profit-hungry hosts by encouraging (some of) them to shrink their margins.”

Yup, as people buy more expensive homes, they end up trying to squeeze more from their Airbnb rentals. They see demand surging and they want to make hay while the sun shines. But when the prices zoom, it drives customers away. They look for alternatives and run back to the hotels. The very industry that Airbnb was trying to disrupt. And that’s going to hurt the platform.

That’s what Brian Chesky is now worried about. He wants to fix the promise that Airbnb started with — great listings, great customer service, but more importantly — affordable.

We’ll have to see if it all works out now.

Until then…

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