June 29, 2023 - 1:00pm

Airbnb is one of the great success stories of the 21st century. By providing an online marketplace for holiday lets, the company has become a major player in the travel and property industries.

This hasn’t been without controversy. Airbnb and similar services have, in effect, transferred millions of homes out of the long-term rental market and into the hotel trade. That’s bad news for renters and also for aspiring homeowners who find themselves competing with Airbnb hosts for the same houses and apartments. The effect is especially concentrated in city centres and tourism hotspots.

But is the bubble bursting? According to the real estate guru Nick Gerli, income from Airbnb properties is collapsing in locations across America. That includes major cities like Phoenix and Austin, where revenues are reported to be down by almost half compared to last year.

Investors who ploughed their savings into such properties are in a tight spot, but it’s even tighter for those who took out mortgages. Squeezed between falling revenues and rising interest rates, many owners could be forced to sell up. With the number of short-stay properties exceeding the number of homes currently for sale in the US, a panicky mass exit could push beleaguered housing markets over the edge.

It was, of course, a dysfunctional housing market that triggered the global financial crisis of 2008. So will history repeat itself?

There are differences between what happened in 2008 and the situation currently unfolding. Back then, the root of the problem was the subprime mortgage crisis, caused by the reckless expansion of lending to high risk customers with insufficient collateral. However, mortgages used to purchase Airbnb properties and similar ventures do not fall into the subprime category — not least because they’re taken out by people who already own their own homes and are borrowing to invest. Unless hopelessly over-extended, they will have collateral.

One might ask whether it’s right for older people with spare capital to push their younger counterparts off the property ladder. But even if the practice is morally bankrupt, that doesn’t mean it’s going to result in financial bankruptcy. It’s also worth noting that we’ve so far avoided the major job losses that played a big part in previous house price crashes.

And yet the pricking of the Airbnb bubble is still a revealing sign of the times. Over the last 15 years we’ve seen tech companies like Airbnb, Uber and Lyft rise to prominence by rapidly expanding the reach of their apps. They’ve taken over the real-world economy by providing — and controlling — the marketplaces that enable entire industries to function. Crucially, the key to success here isn’t necessarily having the best app but, rather, the app that people use because everyone else does. This is why scaling-up is so important. 

However, rising interest rates mean the end of easy money, which is what fuelled the pace of expansion. The app companies have to replace investor cash and cheap debt with revenues, thus requiring consumers to pay more for services whose low cost we once took for granted. All of a sudden, we find ourselves questioning their value. 

Yes, the apps have their advantages, but do we really need them to book accommodation or hail a cab? After all, we managed well enough before. 

And so the significance of this moment may not be the risk of a housing crash or a financial crisis, but instead the unravelling of a business model that has sustained Silicon Valley for more than a decade. 

Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.