Fri Sep 22

Will taxing short stays boost long-term rental supply? Other policies would achieve more

Written by: Peter Phibbs, Emeritus Professor, University of Sydney

The Victorian government, like many governments around the world, has announced new regulations ^[1] on short-stay accommodation. The government says Victoria has more than 36,000 short-stay places, which are reducing the number of homes available for long-term rental.

Other states have capped the number of nights ^[2] a dwelling can be used for short-stay accommodation. The Victorian response has been to introduce a levy set at 7.5% of the short-stay platform’s revenue.

The rationale appears simple – adding a charge to discourage landlords from converting properties from long-term rentals to tourist accommodation.

The government estimates the levy will raise about A$70 million a year. State agency Homes Victoria will use this money to provide social and affordable housing, potentially compensating for losses to the short-stay sector.

How will the levy be applied?

Details of how the levy will be collected are not yet available. However, it appears the government will charge the platforms – such as Airbnb, Stayz and Booking.com – 7.5% of their total revenue. The platforms will bill the hosts.

The levy will begin in 2025. The state government says its levy will replace any local government charges on short-stay accommodation such as the one Bass Coast ^[4] collects.

The platforms have voiced concern ^[5] at the size of the levy and at hotels escaping the charge. The government’s response is that hotels are not removing long-term rental housing from the market.

Some commentators ^[6] from the Victorian tourism sector predict the levy will lead to sharp reductions in tourism. This will depend on how many owners of second homes in tourism destinations opt to shift their properties into the long-term rental market.

Marginal operators might decide this extra cost makes the hassle of running a short-term rental business too high. Some might move to long-term rentals.

The levy might also encourage some potential short-term rental investors to focus their activities in other states that don’t charge a levy. However, it’s possible other states whose budgets are under pressure will copy the Victorian model, reducing this effect.

Indeed, the size of the Victoria government’s levy and its own budget projections imply the intention is more to raise revenue than to eliminate the state’s short-stay sector.

Short stays have boomed under a ‘light touch’ approach

We have previously described Australian approaches to regulating the short-term rental sector as very light touch ^[8].

Under this regime, the Australian short-term rental market has been growing strongly. The sector has increased by about 23% over the past year, according to a new report by the Real Estate Institute of Australia ^[9].

Platforms often claim short-term rentals have no impact ^[10] on rental markets.

COVID-19 provided an excellent natural experiment to test this view. As state and national borders closed, short-term rentals returned to the long-term market. In many Australian housing markets where this happened, rents fell sharply ^[11].

In contrast to the relative lack of state government action, local governments across Australia have long sought to manage impacts of short-term rental accommodation in their municipalities.

These local responses ^[13] include permit and registration systems, which allow local councils to monitor any problems. Some have imposed higher rates ^[14]. This can deter conversion of long-term rental stock to short-stay accommodation but also provides important local revenue for localities with many seasonal visitors.

Ironically, the introduction of state frameworks can override local responses. Byron Council in NSW has been trying to reduce the number of nights hosts can let their properties from the default NSW total of 180 nights. Ultimately, the state’s Independent Planning Commission ^[15] supported a 60-day cap. The council must now navigate a complex process ^[16] to get this limit in place.

Regulations are tougher overseas

The Victorian government move mirrors an international trend of increasing regulation of short-term accommodation. These rules seek to prevent loss of permanent rental supply and to manage the amenity impacts of short-term tourism on neighours and local communities.

In Scotland ^[17], Airbnb hosts now have to register with the government. Those listing whole properties must apply for planning permission.

Cities such as New Orleans ^[18] have created special zones where holiday homes can be rented. It’s another way to balance the demand for visitor accommodation with the need to preserve homes for local residents.

Many European and North American cities have blanket restrictions on short-term rentals, including caps of 30 to 90 days for unhosted properties. These time periods allow local residents to gain income by renting out their homes when they are themselves on holiday.

However, enforcing these rules can be tricky. New York City ^[19] recently introduced regulations that require hosts to be present while accommodating guests – effectively banning the short-term rental of whole homes.

It will take more than a levy to fix the rental crisis

Across Australia, people have called for increased housing supply to improve rental markets. However, given the long lead times in financing and building apartment buildings, new rental supply will take a long time to deliver for tenants.

In contrast, policy changes that redirected short-term rental stock to the long-term market would have an immediate benefit. This is vital in central city locations, where new apartment supply is at risk of diversion to the short-term sector, and in regional markets, where increased population growth has coincided with increased short-term stay activity.

More widely, protecting tenants from unfair eviction and sudden excessive rental increases can help limit the impacts of short-stay platforms. Adequately subsidising low-income renters ^[21] so they can afford decent housing would also help.

Generating extra revenue for Homes Victoria is a positive step, but a tourist tax won’t go far. Renters would gain more in the short term from other regulations that do more to reduce the short-stay sector’s size and growth.