An article entitled “The Rise of Short Term Rentals” in the most recent issue of Montana Business Quarterly lays forth a classic example of markets at work. It exemplifies a market response to a consumer demand. It even includes the inevitable attempt at intervention by local governments to circumvent the emerging market to protect an established market.
Visitors to the state are seeking lower lodging costs and more interesting experiences, while many homes owners in Montana are seeking additional income. So the home owners are renting out their homes on a short term basis to the adventure seeking tourists. This perfect market solution, however, is creating repercussions in an increasingly severe housing shortage and pushing up rents for locals. Increasing rents are usually a market cue to increase the supply of housing.
With many voices raising concerns about the impacts of the sifting markets, undoubtedly from hoteliers as well as those seeking affordable housing, city governments have attempted to mitigate the trend by imposing restrictions that discourage entry into that market, by making it more difficult if not unprofitable.
”Short-term rentals are currently flooding communities like Whitefish, Bozeman, West Yellowstone, Kalispell and Missoula. But smaller communities are seeing it too,” states the article, written by Norma Nickerson and Rhonda Fitzgerald.
Airbnb, an online rental company, reported that in 2017, listings in rural locations accounted for 3.3 million guest arrivals in the United States, a 138 percent increase in one year.
In Montana, visitor data shows a 12 percent increase in the use of short-term rentals within the peak summer season between 2017 and 2018. In 2018, more than 411,000 nonresident groups rented a home or cabin during their stays. “And this growth is happening when overall visitation to Montana is flat,” state the authors.
“Originally short-term rentals were considered a part of the sharing economy, offering travelers a low-cost option to pricey hotels or resorts,” but increasingly the trend has become a more organized commercial operation, utilizing technology that readily connects consumers with property owners.
According to the article, “The success of the short-term rental business model is largely due to demand and investment opportunity. Consumer demand for short-term rentals includes a desire for perceived lower prices, the opportunity to interact with local people, the convenience of a home with a kitchen and an ‘at-home feeling.’ Sometimes it can be the novelty of a different type of experience, be it a luxury mansion or a tree house.”
“Short-term rentals provide a financial benefit for homeowners – singles with high rent, retirees with empty homes or couples with spare rooms in need of cash have found that their empty spaces can bring income.
“Others see short-term rentals as an investment. In Whitefish and Gardiner, the appetite for investments in real estate appears to be a main driver in the rapid increase in the number of short-term rentals. Vacation home owners hoping to cover the costs of owning a second home is another cause. It’s become common for real estate companies in the area to tout the sale of a home or apartment as an income generator.”
In a broader picture the trend is seen as problematic. By increasing demand for existing housing, home prices increase, which is seen to reduce housing availability for moderate and lower income people, commonly called “workforce”.
And, the short term residents change the complexion of neighborhoods.
“In the Whitefish area, there are more than 900 listings for short-term rentals on Airbnb in a town with 7,600 residents.”
In Billings there were 186.
With development costs for new housing unyielding due to escalating costs, and the ratcheting up of arbitrary codes and regulations, that aspect of the market is effectively blocked from responding to the demand for more affordable options, and the squeeze tightens.
“In 2016, Whitefish conducted a workforce housing needs assessment and found that units occupied by year-round residents dropped nearly 10 percent from 2000 to 2010, with much of the shift attributed to second/vacation home buyers. In addition, more long-term rentals are now limited to a six- to nine-month lease, allowing the owner to do short-term rentals at higher rates during the summer months.”
Why the market isn’t able to increase the supply of affordable housing, is not addressed by city governments, which have chosen instead to add more regulations into the mix. “These types of regulations are an attempt to curb the tide and negative impact short-term rentals can have on communities,” explained the article.
“In 2017, a Whitefish Strategic Housing Plan was completed, which included a strategy to convert short-term rentals back into long-term housing. Having grappled with the issue for several years, the town now regulates short-term rentals.
“Other Montana communities also have enacted ordinances to limit the growth of short-term rentals. In 2016, the Missoula City Council approved rules for homeowners, which included complying with housing safety codes, limiting the number of guests allowed per square foot and notifying neighbors about their rental status. A $52 registration fee is required for short-term rental owners, along with a $27 yearly fee.
“When Bozeman approved similar regulations in 2017, they were much stricter. The city requires a $250 annual fee, a $225 one-time fire inspection fee and up to a $1,500 administrative conditional permit fee. All of these communities require the owner to submit the lodging facility use tax to the state, as well as a county health accommodations license.”