The Winners and Losers in Israel's Airbnb Wild West

The widespread and unregulated phenomenon of short-term rentals is hurting hotels and travel agents. But with 20,000 apartments vanishing from the housing market, the Israeli public suffers the most.

Tourists in Tel Aviv.
Tomer Appelbaum

Last month, New York State approved a law prohibiting the advertising of apartment rentals for periods of less than 30 days in certain areas, with violators facing fines in the thousands of dollars. Not surprisingly, right after Governor Andrew Cuomo signed the bill into law, online rental company Airbnb filed suit in federal court alleging the law was unconstitutional.

But New York is not alone. Europe has also come to recognize the need for regulation of the expanding short-term rental industry. In Berlin, some landlords are required to register the apartments they wish to rent out and obtain prior approval. In London, landlords are only allowed to rent out their homes for 90 days a year.

It’s no exaggeration to say that, eight years after its founding, Airbnb has revolutionized the worldwide accommodations’ market. The Airbnb website says the company operates in 191 countries and 34,000 cities around the globe, with more likely to follow.

In Israel, too, the short-term rental industry has grown by leaps and bounds. Short-term rental apartments, advertised on Airbnb or other sites, have become hugely popular, especially in Tel Aviv and Jerusalem. But to date no legislation has been introduced to regulate the emerging industry, and the authorities have turned a blind eye to the phenomenon.

Airbnb was initially welcomed by governments and ordinary people as another facet of the social economy, where private individuals bypass expensive services provided by commercial businesses, hotels in this case, for lower-cost services offered on a peer-to-peer basis. The service providers get to earn some extra income and their customers save a lot of money, whether it’s for a place to stay on holiday, a ride to the city or a small loan. But the social economy isn’t a win-win business for everyone.

A boutique apartment in Tel Aviv available for rent on Airbnb.
Airbnb

“The problem isn’t that people rent a room in their apartment through Airbnb, or rent out their whole apartment when they go abroad for a couple of weeks,” says Noaz Bar-Nir, CEO of the Israel Hotels Association. “The problem is that it’s turning into a business in every sense of the word. There are people who have dozens of apartments that they rent out short-term. These apartments have become hotels that bypass regulation.”

And it’s not just the hotels and travel agents who are being hurt by this unanticipated competition, says Bar-Nir. The biggest loser is the Israeli public. “The government is making a great effort to increase the supply of apartments, and meanwhile 20,000 apartments have vanished from the housing market,” he asserts.

Tel Aviv is ignoring the issue

The basic problem with the rental of short-term vacation apartments is that the practice isn’t clearly regulated. Residential units are meant to be used for just that – to reside in. Someone who wants to use his home for another purpose should have to obtain approval from the local planning and building committee. In the case of Airbnb, the alternate use is as a hotel.

“A hotel is designed to different standards than residential housing, like safety standards and avoiding disturbances to neighbors because hotel activity is much noisier,” says Yaron Grofman of the law firm Tadmor Levy. “But what happens is that in one small apartment building in Tel Aviv, several apartments have been turned into noisy vacation apartments. People using their apartments that way are supposed to get a special permit, he says.

The local authorities aren’t doing anything about these violations, Grofman says. “The local authority is responsible for enforcing the planning and building laws for the benefit of the local residents. Tel Aviv has the most vacation apartments available, but there is no serious enforcement at all,” he says. “The municipality is probably looking at this as a way to attract more young tourists.”

Why don’t the owners of vacation apartments request special permits? When an apartment is being converted into a shop or an office, the need for a permit is clear, but when it comes to short-term rentals, the boundaries are somewhat blurred and the question becomes more complex.

“There are no clear guidelines in the law as to when a short-term rental becomes a hotel,” says attorney Anat Biran. The loophole is being exploited by some apartment owners and there should be legislation to define the problem, she asserts. “It’s a matter of reasonableness. We presume that a person spends more time in a residential apartment than in a lodging unit.”

There are planning implications as well. “Short-term rental apartments are located in residential neighborhoods. The city is supposed to provide for public needs in this area, such as schools, and it plans accordingly. But when many of these apartments start being used as hotels, it plays havoc with city planning,” says Biran.

She warns that, as the phenomenon spreads, certain areas will see fewer and fewer apartments available for residential purposes. “It ends up reducing the supply of rental apartments in the neighborhood, and consequently causes rents to rise, because of the lower supply and high demand.”

The ones who suffer most when apartments are suddenly turned into little hotels are the neighbors in the building. Rather than have long-term neighbors, there are new guests coming all the time, and they often have parties until late at night – they’re on vacation, after all.

Every complaint investigated

Airbnb has a special department that handles complaints from neighbors. The company says every complaint is thoroughly investigated and, if warranted, it will remove the apartment from its database.

What legal recourse do neighbors have? Grofman says there are actions that can be taken against the landlords. Biran says that if the vacation apartment owners would submit a request for a special use permit, the neighbors would be able to file objections. Barring that, the neighbors could file a lawsuit claiming a disturbance. They could also request a court order to halt the unwanted activity.

The chief objector to the phenomenon is the Israel Hotels Association, which in September issued a position paper detailing the problems caused the rental of vacation apartments without regulation and supervision. Attorney Nir Kaplan, head of the IHA regulation department, cited the adverse impact these short-term rentals are having on the local housing market.

The IHA complains that the government is ignoring the expansion of vacation rentals at a time when it is making a major effort to increase the housing supply. It says that most of the vacation rentals are located in the most desirable areas and essentially subtracting units from the market.

The hoteliers also decry what they see as discrimination. While they are required to meet strict licensing, planning and building standards, are subject to certain taxes and could face heavy criminal and civil sanctions for violations, operators of vacation rentals are not subject to any such regulations.

“When someone wants to build a hotel, he has to select a lot that is zoned for hotel use, design the hotel to meet the city’s planning requirements, the requirements of the Tourism Ministry, and all the business licensing requirements (from fire officials, Home Front Command, police, Health Ministry, Environment Ministry, accessibility, etc.). Plus all the tax requirements. While somebody who wants to operate a vacation apartment is completely exempt from all of these requirements,” the paper said.

The IHA says that the situation in Israel is more extreme than in other places. In London, for example, the number of rooms on Airbnb amounts to just 10% of the total tourist accommodations. In Tel Aviv, there are 7,000 registered hotel rooms and 6,500 on Airbnb.

The IHA says it is not out to block healthy competition between hotels and vacation rentals, it just wants to see the vacation apartments being subject to the same types of business regulations.

Airbnb says on its site that it will compensate apartment owners for up to one million dollars in property damage, but many things are not covered under this policy. In some countries, not including Israel, Airbnb hosts can purchase insurance to cover third-party damage, if, for example, the guest break the faucet in the tub and the neighbors’ apartment is flooded.

Hidden income

The tax authorities also have their eyes on professional vacation apartment operators. The concern is that many of these owners are not reporting the income from what is essentially a business, and thus evading taxes. To the Tax Authority, a short-term rental apartment is a business, just like a hotel or a zimmer. This is in regard to apartments that are rented out continually and not to the individual subletting his apartment for a short period when he is away.

The Tax Authority estimates there are 10,000 such apartments in the greater Tel Aviv area alone, and another 10,000 scattered throughout the country. It says it is working hard to identify these apartments, with inspectors sometimes sent to look for the owners. These efforts have turned up people who have been renting short-term apartments for years, earning hundreds of thousands of shekels in unreported income.

In August, the authority conducted an oversight operation in the Tiberias area, with inspectors visiting zimmers, guest houses and vacation apartments in the area. Fifteen percent of the businesses inspected were not properly reporting their income. One landlord was found to have been operating a short-term rental on a daily basis since 2014 but had never opened a file with the Tax Authority for it.

Local Authorities are also losing out, since they are not collecting taxes for property improvements or special or new use permits for apartments that are being used as vacation rentals. The IHA cautiously estimates that these sums reach tens of millions of shekels annually, at a minimum.