If you’ve been a long-time listener to the show, you’ll know that I’m a big believer in the law of supply and demand. It’s one of those fundamental rules that you ignore at your peril.

Like any market, hotel room prices, and short term rental revenue comes down to supply and demand. In markets where there is nothing to constrain supply, the incentive exists for more and more property owners to remove properties from long term rental inventory and maximize revenue through higher nightly short term rates.

That business only works if you can achieve high enough nightly revenue, and high enough occupancy. If there is no constraint on the supply, this market will become a race to the bottom like many other markets in the sharing economy. We’ve seen it in ride sharing with companies like Uber and Lyft. As more and more cars come onto the road, you have a surplus of drivers competing for not enough riders. When that happens, prices fall to the level of tolerable pain, but nobody’s making any money. Who are the winners in all this?

The owners of the sharing platform make money on each transaction, and the end consumer gets the best possible price. The asset owners get left with all the risk and marginal profit.

So how do you protect yourself from these downward spiralling market dynamics? Have a listen.