In this week’s newsletter, we discuss Airbnb’s broken business model, Bengaluru traffic, money tips and a lot more.
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Is Airbnb broken?
A year ago, many people were predicting the imminent collapse of Airbnb. Reddit forums and Twitter were calling it the âAirbnbustâ. 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 wasnât all just a rumour. Maybe there was some truth to it. Because a couple of days ago Airbnbâs CEO Brian Chesky acknowledged that itâs a fundamentally broken business. So whatâs going on, you ask?
Letâs 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. Thatâs 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 âAir Bed and Breakfast.â
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. Youâd make a quick buck. And the guest would get to maybe spend time with a local whoâd 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 â especially from the hosts â is also what eventually led to the âAirbnbbustâ 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. Thatâs 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 â 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 wasnât a bust at all.
Alright, now that weâve cleared that bit up, you will be wondering â 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 âthe short-term rental speculator.â 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 âMake $100,000 from your Airbnbâ, we donât 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 wasnât 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 didnât own homes too.
It was a double-whammy â 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 donât 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 itâs that users of Airbnb are getting disillusioned. They hate the terms and conditions and the high prices â which often include an exorbitant cleaning fee which shows up only when youâre about to hit âbookâ. 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, âChesky walks a delicate tightrope as he tries to motivate profit-hungry hosts by encouraging (some of) them to shrink their margins.â
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 thatâs going to hurt the platform.
Thatâs what Brian Chesky is now worried about. He wants to fix the promise that Airbnb started with â great listings, great customer service, but more importantly â affordable.
Weâll have to see if it all works out now.
Can a tax solve Bengaluruâs traffic woes?
âš20,000 crores.
Thatâs roughly how much Bengaluru loses each year due to traffic congestion. Youâre stuck behind an endless sea of cars and itâs wasted time. So researchers took the time lost by being stuck in traffic and converted this into productive or salary hours to come up with a singular number.
And if that number didnât blow your mind, hereâs something even more damningâââin 2005, traffic in Bengaluru moved at the speed of 35 km an hour; in 2014, it had slowed down to 9.2 kmph; by 2016, the speed dropped like a rock to around 4km an hour during peak times in IT zones.
Insane, huh?
Now we could go on and on about how Bengaluru is one of the most congested cities in the world. But we think weâve made our point and you know the extent of the problem by now. And if you think about it, in a sense it all boils down to one thingâââpopulation growth. The unsustainable kind. The number of people living in the city has shot up by 2.5x in the past couple of decades.
And this burgeoning population comes with higher disposable incomes and aspirations. Car ownership is still very much a status symbol and that has exploded too. Meanwhile, other than simply stretching the borders of the city further, not much has changed. The urban road infrastructure simply hasnât been able to keep up. Wide roads might seem attractive. Flyovers appear as a credible alternative. But all this offers temporary respite. All it does is attract even more cars onto the roads. And itâs only a matter of time before those get clogged too.
So, whatâs the way out? You canât just put a cap on the number of people who can move to the city every year, right? You canât impose a ban on vehicles, no? These would be too draconian.
Well, policymakers think that the magic bean is something called a âcongestionâ tax.
Simply put, it means that if you choose to take your car out during peak times, you shell out an extra fee to the government. Itâs a disincentive to stop you from firing up your car on the way to work. Itâs a way to get fewer cars on the road, reduce the congestion, and hence the wasted hours.
But how will this even be implemented, you ask?
The legendary FASTag of course. Every carâs windshield already features this pre-loaded digital wallet in the shape of a sticker. So itâs just about extending it to collect a toll at entry points to major roads. Yup, that means youâll need toll-like checkpoints with roving cameras. So the moment you swerve into a lane which has been flagged for heavy traffic, ping goes the camera and a bit of your money.
Now you can be sure that a lot of people are going to be livid if this plan eventually becomes reality. After all, youâve already paid all those gazillion taxesâââGST, road taxâand even tolls when you are travelling. And now you have to pay another tax? It seems like policymakers are shunning their responsibility and simply masking their incompetence with an additional tax.
But let’s suppose you are playing the devil’s advocate here. How would anyone justify this? Well, one idea is thisââif the roads are overrun by vehicles and congested, you have to inevitably pay for it; you pay for it in terms of lost time. So you could simply pay some money and hope that you save time with fewer people on the road. This is a direct payment of course.
And Bengaluruâs not the first city to dream up this stuff. We have some real-world experiments to turn toââânotably London and Sweden. And the experiment in London seems to have shown some promise. Between 2002 and 2014, the number of private cars entering these so-called congested zones dropped by 39%. The annual revenues of ~$300 million were directed towards public transport systems. Until ride-hailing apps like Uber popped up and messed it up again. But until then at least the congestion levels dropped.
Even cities like New York are considering it now.
And if youâre worried about whether this will hurt low-income people, it appears that it doesnât. When London was getting ready to introduce this tax, studies indicated that only 14% who came into central London did so by car. They were folks with a higher income anyway and could afford to part with 5 pounds a day. And New York might just hand out some form of a tax credit to households below a certain income threshold. After all, earlier studies indicated that only 2% of the cityâs working poor would be affected by congestion tax. And if you look at a place like India, you might be able to split this argument into a 4-wheeler versus 2-wheeler matter. If you consider that upper-income folks drive cars to work and others commute on two wheels, naturally one set of wheels will get an exemption here.
So yeah, that’s the argument for a congestion tax.
But hereâs the thing, despite all this, London still continues to top the charts when it comes to traffic congestion. Even with its fairly robust public transport system. And one of the reasons is the limited urban infrastructure. London decided to make the city more walking friendly. And since they couldnât really expand, they did the next best thing. They shrunk roads and widened footpaths. In the end, the road congestion remained. A trade-off really. And itâs something Bengaluru will have to mull over if they choose to go down this route.
And not to forget the immediate need for public transport. Look at Bogota in Colombia which was also infamous for traffic congestion and introduced a tax. As per a government official Felipe A Ramirez Buitrago at the time:
The most important thing was providing reliable public transport. BRTS [bus rapid transit system] buses run from 4 am to 11 pm. During peak hours, the headway is 1 minute and 50 seconds. If you want a massive system, whether metro or bus, you need good headway. Otherwise, people wonât come. We also provided first- and last-mile connectivity by building better walking and cycling tracks.
And therein lies the rub of the problem. Bengaluru has a massive shortfall of buses. The metro still doesnât offer adequate last-mile connectivity. And even the priority bus lanes theyâd introduced in 2019 have since been scrapped. So unless public transport is adequate, just trying to take the cars off the road with a tax wonât be enough.
Itâs a complicated problem to solve.
Jargon of the Day
Money Tips
: Why you shouldnât stop an SIP
In 2022, over 1.36 crore SIP accounts were closed. They either completed their tenure or discontinued. And this number went up to 1.42 crore within just the first 9 months of 2023.
People are probably unsure of how their investments will fare in a volatile market. Or maybe they think that itâs best to harvest profits when the market peaks. But is that a wise approach?
Well, first things first. SIP stands for Systematic Investment Plan. This means that you invest the same amount at the same time every month to build a bigger investment corpus. And itâs a great long-term approach. Thatâs anything over 3 years. So if you invest in an SIP you have to be clear that you cannot or rather should not withdraw that money in the near future. This builds an investment discipline by investing a fixed amount regularly and seeing your money grow, while not touching it for your regular expenses.
The next thing about SIPs is that they help in Rupee cost averaging. Itâs a simple approach wherein you protect your investments from market fluctuations. This means that you get fewer mutual fund units when the market goes up and more of them when the market dips. Sure, your investments may grow slower when markets fall, but you also have the advantage of more mutual fund units which will grow fantastically when markets go up. So what happens when you panic about future market corrections and just take out your money?
Well, you lose out because you try to time the market.
On the other hand, if you had invested in an SIP with a goal that you need a certain amount of money after a fixed period of time, and you see that your SIP has achieved this goal then you probably could stop it.
Or the best thing? Unless you absolutely need that money, staying invested until you need it is actually harmless. So just SIP it and forget it!