Location, Location, Justification

Europe is in a housing crisis. Between 2010 and 2024, house prices in the EU rose by 53%, well ahead of inflation, and they are still climbing. Short-term rentals are seen as an important source of this issue, prompting cities like Amsterdam, Barcelona and Paris to restrict them. But under which conditions can they do that? Within six weeks, the EU has produced two texts answering that same question: the proposed Affordable Housing Act and the CJEU’s Smartflats decision. These texts make it considerably more difficult for governments to restrict short-term rentals. In that way, they provide a glimpse of how EU law curtails local governments’ ability to shape urban environments and how the EU’s emergent housing policy will respond to a “bitter generational battle” over affordable housing. In turn, they prompt the question of who defines the conditions for a livable city today: the Court of Justice of the European Union, residents, or, as some in Silicon Valley would have it, the corporations that increasingly own the city?

Context

While it is not new for people to briefly rent out rooms in their apartments or houses, platforms like Airbnb and Booking.com have made this activity significantly more popular. They lowered the transaction costs, thereby making it easier for many to participate in the marketization of residential property. That market is open to people occasionally renting out their dusty attic, but also to professional firms turning residential streets into tourist corridors. Many cities have tried to curb this development (such as Amsterdam, Berlin, Paris and Barcelona). Concerned about rising housing prices, gentrification and city livability, they introduced permit requirements for hosts, often limiting the number of nights per unit and requiring the conversion of commercial space elsewhere into residential property.

These rules, however, are in tension with EU law. In 2020, the Court of Justice decided that renting out residential property constitutes an economic service (Cali, §34). This means that the 2006 Services Directive protects this activity from arbitrary government restrictions. Assessing whether local rules comply with EU law thus requires balancing a city’s right to organize its territory against someone’s freedom to make money from renting out property. Consequently, rules mandating a permit for this activity need to meet specific requirements as set out in the Services Directive. Centrally, the scheme must be justified by an overriding reason of public interest, and its objective must not be attainable by less restrictive measures (Art 9 (1) Services Directive).

Affordability as Justifying Restrictions

One of those public interest grounds is housing affordability. In the 2020 Cali decision, the Court held that this goal could justify mandatory short-term rental permits with accompanying duties to convert commercial space into housing elsewhere (§§65-74). The challenged French permit scheme could meet the least restrictive measure requirement because of how it was built: it covered just one specific activity, exempted owners renting out their main residence and applied only in a limited number of densely populated cities under rent pressure, as evidenced by “several documents provided by the French Government […].” The compensation measure should actually help the rental market, ideally shown by “studies or other objective analyses”, be fitted to specific neighborhoods and still leave the activity profitable. The Court also held that owners should have realistic ways to meet the compensation requirement, including by buying compensation rights from others (§§87-94).

Except for a 2024 Regulation establishing data governance requirements for these authorization systems, EU law remained silent on the legality of such permits after Cali. This fall, however, has brought two new legal texts on the matter. Both limit the extent to which local governments can justify their short-term rental restrictions on housing affordability grounds.

Affordable Housing Act

First, the recently proposed Affordable Housing Act (AHA) would introduce a new framework to assess the legality of public restrictions on short-term rentals; the Services Directive would be disapplied in this regard (Art 3 (1) AHA). Two things are important here: a new standard of proof on the necessity of measures and the scope of this proposal.

Cali set a low and flexible standard of proof for demonstrating the necessity of short-term rental authorizations generally (see here and here). The Court accepted the public interest ground of housing affordability on the strength of a single study, submitted by France during the proceedings, showing that short-term letting had “a significant inflationary effect on rent levels.” Studies or “other objective analyses” were “particularly relevant,” but the Court required no particular form of evidence, no threshold and no minimum period. Nor did it require the study to predate the law. The AHA, however, would allow permit systems only for regions with a housing price-to-income ratio of at least 8 that has risen over the past ten years, or one of at least 10, with no easing expected for three years (Art 6 (1)-(2) AHA). Governments should also demonstrate a “significant adverse effect” on housing in the regulated area over at least three years before the measure is adopted (Art 9 (2) AHA). Preventive action of the kind Paris took in the Cali case would become difficult, because the harm must already have been shown for three years.

At the same time, this higher standard of proof would only apply when governments base the permit system on the public interest ground of housing affordability and availability (Art 2 (2) and recital 15 AHA). Schemes and other restrictions exclusively based on different public interest grounds still fall under the Services Directive and its arguably more permissive framework. Governments could, in other words, circumvent the AHA’s high standard of proof by justifying their permit schemes exclusively on other public interest grounds. This raises the question: how viable are public interest grounds other than affordability to justify short-term rental restrictions?

Smartflats

This is where the Smartflats decision comes in. The Court was asked to rule on whether a Brussels permit scheme requiring a fire safety inspection and a zoning permit could be justified on grounds of tourist and urban environment protection (§66). These two public interest grounds differ, on their face, from those regulated by the AHA proposal. How the Court delimits these public interest grounds is important now and will only be more so to the extent that the AHA is adopted. The Court, however, does not create much new regulatory space for local and national governments.

Tourist protection, while new for short-term rentals, is a relatively thin justificatory ground for permit measures that require prior safety and hygiene checks. The Court offers three guidelines here. First, if existing housing rules already oblige every flat to meet safety and hygiene standards, a government cannot invoke those same standards to justify a separate authorization scheme (§84). Second, the Court does not rule out that tourist protection may warrant additional safety, criminal record and insurance checks, but leaves it to the referring court to assess whether declarations and ex-postchecks could guarantee similar (or identical?) levels of protection (§87). Third, if other regions can similarly protect tourists with a simple declaration and inspections afterwards, that is “a strong indication” that Brussels could do the same (§86).

The urban environment ground brings nothing new to the table for local governments. While the Court acknowledges that this ground is broader than the protection of housing, it interprets the zoning permit only as a measure seeking to protect housing affordability and availability (§§72 and 89). The Court proceeds by effectively restating the most important elements of Cali and leaving the assessment of the Brussels rules to the referring court (§§88-96). Interestingly, the Court also held that the objective of providing affordable housing cannot justify restrictions on renting out primary residences (§95). Where Cali made this a point in the French scheme’s favor, Smartflats elevates it to a requirement, further narrowing the regulatory space that the affordability ground leaves to local governments even before the AHA enters into force.

In sum, Smartflats introduces only a narrow public interest ground with regard to tourist protection. The protection of the urban environment is reclassified as housing affordability and availability, a ground that the Court then narrows further than it did in Cali.

Livability

These EU law obstacles make it more difficult for local governments to regulate short-term rentals. This may lead many to abandon their regulatory ambitions. Others may have to get more creative in justifying their interventions. This is exemplified by the Dutch turn toward “livability” as a justification for short-term rental regulations. Amsterdam recently applied this approach: from 1 April 2026, the city halved the holiday-rental cap from 30 to 15 nights a year in eight neighborhoods. When objectors argued that such small-scale rentals do not deplete housing, the city agreed. It said that the new cut serves “not to combat housing scarcity further, but to improve livability” (my translation).

Should this approach be a reason for concern? Livability may support discriminatory public planning. Amsterdam’s policy stigmatizes tourists; they are seen as a threat to city livability as experienced by its inhabitants. That the interventions are based on surveys gauging how these inhabitants feel about the “social cohesion” in certain neighborhoods underlines this point. This approach should invite scrutiny, as it sounds similar to Danish justifications for evicting non-Western citizens from public housing in the name of “social cohesion” and “integration”, which were at issue before the CJEU in Slagelse.

The comparison has its limits, however. Slagelse concerned the stigmatization and dispossession of the same group. Short-term rental restrictions, on the other hand, stigmatize tourists, but affect the rights of a different group: those seeking to make money off residential property. Increasingly narrow public interest grounds and higher standards of proof advantage platform firms and homeowners. These rules protect housing and the city as an asset. Whether this “assetization” creates just governance over scarce resources is a fundamental question that the European Commission needs to answer.

Conclusion

Who, then, shapes a city? The EU legislator and the Court of Justice of the European Union increasingly play their role by making local governments justify short-term rental rules through ever more granular measurements. This burden and standard of proof reflect how free movement law often sees housing and cities as assets. They are constructed as privileges rather than spaces to which citizens can claim equal rights.