If the law is not enforced at all when there are rampant, clear violations, then it's irrelevant whether it's technically illegal or not. Now the game's about to change though...

And in fact, I would argue that a law which is not consistently enforced is by definition not a good law.

You may want to read up on Pablo Escobar and how much money you can make from a product that people want, but which is illegal.

The investors who are valuing AirBnB so highly are the same people with access to lobbyists and the sort of money that talks loud enough for government officials to hear. I doubt they'd be investing so heavily if they didn't believe they could game the system (for better or for worse).

You're giving VCs and institutional investors way too much credit. The amount of educated people who buy things based largely on the fact they are popular and growing is still pretty large, especially in a frothy environment like this one. They're more interested in getting out when it looks like growth is over than fighting the legal system to ensure a business can stay in operation.