Relative Poverty [houses] — living in abundance or scarcity ?
I had a conversation with a company that aims to build a platform for real estate professionals. They address an audience of wealthy end-users, people who are looking to invest through second-property houses, and the explore property markets to help real estate professionals in making good deals.
It was ironic when the conversation moved on gentrification.
Gentrification is affecting price properties in the same city where their employees of that company are working, so much that finding an house would turn challenging also for themselves.
So, on one side, employees’ impact is to increase profit for their clients by investing in houses, and on the other side to make more and more difficult to find an house — for themselves (or people with alike financial status).
It is even more ironic that houses are then rented, especially through Airbnb — because it yields more profit than renting for longer period, and it offer better deals for landlords holding many many properties. So employees’ impact will drove prices up even more, in a positive feedback.
I thought the company may offer special deals to their employees: after all, the company claims to use AI to align prices on properties and their direct clients are real estate agencies— but apparently not.
To address and quantify that “apparently”, I replicated, out of curiosity, a few activities of that company : data-mining, aggregation, analytics.
700 houses — I took as data, in the same city where the company operates (a European hub for startups). It turned out that a lead business developer at that company could not afford even smallest flats with 1 or 2 rooms.
In figures, the median housing cost of T1 / T2 flats was 1200€/month — equivalent 100% of the net salary of our lead business developer.
Cost of housing equivalent to 100% of salary…. how…
How come that a business developer, working to help make better deals in real estate, cannot even afford an accommodation out of own salary?!
I thought, mmm, maybe this condition is not set by the company — it is endemic.
How does the return of your working efforts cope with the ecosystem you’re contributing to create ?
Relative Poverty, Relative Wealth.
I wanted to extend research, starting from my native Country — Italy.
Italy is a G8, we have good food etc. etc., pizza mandolino etc. So people, at least people who are actively employed, should have access to a standard of living that could be decent — but what is decent?
How much should be a salary respect to cost of housing, for a decent life?
They say your gross salary should be between 3x~4X your housing costs.
A few sources for this rule of thumb.
- Reddit https://www.reddit.com/r/personalfinance/comments/1o5hfm/house_costs_25x_or_3x_or_35x_your_salary/
- CBNC
https://www.cnbc.com/2018/06/06/how-much-of-your-income-you-should-be-spending-on-housing.html
How many people could actually access this standard of decency ?
CBNC quotes how to become “automatic millionaires” :
“According to the Federal Housing Association, a good rule of thumb is that most people can afford to spend 29 percent of their gross income on housing expenses — as much as 41 percent if they have no debt."
Mmm… Most people can afford to spend ≤30% of their gross income in housing expenses ? Is it really true ?
Let’s see if it meet reality — at least in my own Country.
Short Anecdote
One time (around 2012) I was visiting Milan and Couchsurfed (Couchsurfing.org). I was hosted by a couple of Chinese people, working as interns for a “architecture design study for luxury properties”. I remember they could barely pay for their room by summing their interns salary.
Yet, they were working with bright eyes on their future… The agency was actually owned by Turkish management, but the “brand” (oh, the value of brand) it was Italian…
With a dream, but poor — living out of noodles (the yummy side, I like them) and working hours beyond the schedules, they paused from working on the computer to share their dinner made of microwaved plastic bowls and young kindness with me.
Their works contributed to provide “luxury experiences” — while they were experiencing poverty. But they have each other at least.
But see, you could read: They have each other at least. But their works contributed to provide “luxury experiences” — while they were experiencing poverty. It sounds negative, and that’s why this question, after 6 years.
This time (2018).
How many people are still working their time in a normal jobs, yet half of their income goes to afford — a room ?
Methodology
As first test, I collected 25K data-points on the house market — rental of rooms (yes, just rooms), flats and/or houses in most representative cities in Italy.
Is it a good sampling?
The bureau of statistics in Italy (ISTAT) estimates there are 25M household properties in my Country — about 2.3 people per each.
Source — https://www.istat.it/en/files/2015/09/ItalyinFigures2015.pdf
That means there should be ~600K houses in a city like Milan, of ~1.3+M people.
I did not researched much about the share of rental properties. An article inquiring on speculation of market prices, comments demand is increasing out of 70K offered properties, so offer may be about ~10% of households.
The sampling I collected varies between 10² and 10³ data-points per city: they represent rental housing market with 95% of certainty, with an error ranging from 2% in larger cities (Milan, Rome) to 15% in smaller cities (about 200K people).
I then looked at Gross salaries in my Country, and calculated how much of after-tax income you have to allocate to have an accommodation, if you wanna live and work in that city.
For salaries, I picked up a range between 5K / yr and 36K/yr.
I choose 5.000 € as low end because:
- it is the value of simplest contractual norm you can do for fiscal administration in Italy ( “prestazione occasionale” is a type of contract meant for jobs you do occasionally, not beyond 5.000€/yr. And you don’t get income tax up to 5.000 €/yr).
- internships are regularly posted as job offers in market labour sites. They are not paid or paid about 400€/months in Italy, and cover a period of time from 3 month to 6 month, but can be iterated more times — it is not rare graduates are offered to work 1 year or more under contract of stage or “apprendistato”.
So I think 5.000€ / year reflects income of a relevant part of population in working age.
I choose 36.000 € because:
- OECD claim it is mean value salary in Italy.
- Incomes up to 26.000€ gauge about 80% of the Italian population.
Source: https://www.researchgate.net/figure/Income-distribution-in-Italy_236246222
I will comment more on real salaries at the end of this article, but keep in mind that those number encompasses a range of jobs, whose pay-offer we can looked up on specialised job sites — a few example from Indeed:
- worker ~12 K €/year
- waiter ~12 K €/year
- graphic designer ≤ 10 K €/year
- IT ~ about 25K €/yr
- data-analyst ~31K €/yr
All combined, I think it offers a first insight on how well you can live to afford an accommodation out of your salary.
This is what I found!
Can you afford a room to live in your city, out of your salary (or in spite of your salary) ?
Let’s compare a few cities.
Milan
In Milan, the median distribution of rental prices for a room is about 500 €/month.
Even if you’re looking for small flats (with 1 or 2 rooms) you’ll often have to disburse at least 450 €/month.
If you are hired with a salary of 26.300€ and need to find a room to move in Milan, you know in more than half of your chances you will need to spend between 40% and half of your monthly income — for a room. A salary of ~26.000€/year encompasses income of portion of IT and software developers; it is well more than a salary of a worker, and it about the income of people working as freelancers for only one client company — this is illegal but sadly a practice in Italy. Examples can be found in studies of architectures and design where they can offer to work for them only, 40hr/week; or a driver for delivery.
[Edited: My guess was true. Self-employment gross income in Italy — see national statistics bureau : https://www.istat.it/it/files/2017/12/Income-and-living-conditions-Stat-Report-2016.pdf ]
If your salary is about 19.000€/yr, you are beset with finding an accommodation. More than 9 out 10 house offers will require you to disburse between 40% up to 70% of your net income, and it is here that a few hundreds euros more or less, in the span of a year, will make a difference on your living.
As example, with 300 € more in a year, you have almost half of probability to pay “just” 40% of your income for a room; with 300€ less (that is, ~30€ / months less in your monthly income), you have 2/3 probability that almost 2/3 of your income, will go for a room accommodation.
With a salary of 36.000 €/yr, you are tranquilo : chances are you will find a room in a shared flat paying less than 30% of your income, 4 times out of 5 in those accommodation offers.
Rooms beyond 70% are considered out of your range — you can’t make a living. Rooms costing beyond 100% of your salary are not displayed in the graph — but still count in the market share. They are marked as “NOT accessible market share”.
Rome
In Rome rooms are on average about 100€ / month less costly than Milan.
If you are looking for a room in flats with up to 2 rooms (so 1 flatmate), you could play heads and tails — you’ll pay in almost half cases 400€ per room.
Naples
Naples is third largest city in Italy.
Here, you can start to pay around 300€ per room /month. A fair 40% less than Milan in housing costs impact more than linearly in lower salaries: to make a comparison with above numbers, if you would look for a room with a salary of 19.000 €/yr you could have access to all market offers, and in 2/3 of them you would deal with less 30% of your salary.
In Naples, you have a relative costs that is on your advantage, at parity of salary VS Milan and Rome.
Gender Gap ?
I also wanted to have a look if there was a gender gap.
Is there any bias in finding an affordable room if you are female or male? Are room prices higher for males? Higher for females? Landlords doesn’t want you as a tenant?
To estimate if a flat was totally populated by only one gender, I just look at the posts of houses offers: if the post offer 1 room, but all other members of the house declare to be of only one gender, I assumed they don’t want diversity in their crew.
Example.
- 3 females 1 room offered: mark it as female-only flat.
- 3 males 1 room offered: mark it as male-only flat.
I then look how flat sizes are distributed for gender and price paid by tenants.
I then calculated the share of flats populated of one only gender.
Let’s see what I found.
Availability of flat size by Gender
Does your gender impact, when you’re in search of a room?
Milan
I haven’t found much of a difference in the distribution of flat size (how many room that flat is made of) and price.
More or less, male and females live in flats of similar size.
However, males seems to concentrate also on very small flats (≤ rooms) as well as in shared flats with 6 rooms — females seems to concentrate on flats with up to 3 flatmates.
We don’t know if because there are more males in search of a room in Milan — maybe for the Polytechnic studies ? — we don’t know if this distribution was due to preferences, adaptation or resilience to what house market has to offer.
I recall when in San Francisco, I visited a dorm for startuppers, paying 1.200$/month, for a bed… in a dorm… of dozens of beds .. in the same room…! Oh yes tenants were also given access to wifi and the San Francisco vibe (of course!).
Luckily, not such a speculation in Milan (yet?).
Rome
Also Rome show a preference of female gender for flats with 3 rooms (2, 3 flatmates), while males seems to adapt more, at parity of room price, to size of flat.
Naples
Naples does not show this difference, but it seems there are more flats populated by female gender only. We don’t know if it is because there are relatively more female in search for a room.
Gender population in flats and shared houses
Let’s see now the share of available flats that request you belong to one specific gender, or not (that is, sorry, only females here — or, sorry, only males).
Let’s also see if availability changes according to your pockets: are houses with 1, 2, 3 rooms monopolised with request their tenants belong to same gender?
Do you need to look at dorms or live in a hostel (I’ve known people leaving in hostels in Rome, for they could not afford a room) ?
Milan
In Milan does not matter your gender when looking for a room. You’ll get same chance to find posts for mixed, female-only, and male-only flats.
Things get a bit different for rooms at prices above the median (in Milan, 500€/month) : here there are more shared houses for female only, 2x than flats populated by males only. However, while prices goes up, shared flats are more and more populated by mixed genders.
Rome
Rome is even more gender “equal” in this matters. There is still an equal proportion between shared flats for female-only, male-only and mixed among cheeper rooms (ones below the median price of 400€ in Rome), but as prices goes up people tend to blend more in flats. However, a proportion of female-only flats, for rooms more expensive than 500€, is about 2x of male-only flats.
Naples
In Naples female-only flats seems to be 3x Vs male-only flat. It is interesting that are not equally distributed: rooms offered above the median price (in Naples, rooms above 300€/month) are relatively more available for females, either in female-only flats and mixed flats. Do males prefer mixed flats if they have to pay more? Or is it because there are less rooms at higher prices occupied by male only?
Italy
On aggregate, in Italy, pictures shows that flats gets populated evenly distributed between mix, female-only and male-only house offers of lower prices, while for prices above the median rooms offers for female-only flats are 2x than offers for male-only.
Framing relative housing-costs with salary distribution
Statista (source: https://www.statista.com/statistics/798643/average-monthly-net-salary-of-employees-in-italy-by-citizenship/) shows that, on average, NET salary in Italy is about 1.500€/month for people holding Italian citizenship, 1.200€/month for EU citizens and 1.100€/month for extra-EU citizens, that approximatively correspond to gross salary of 28K €/year, 21K €/yr and 19K €/yr.
ISTAT (sources: https://www.istat.it/it/files/2017/12/Income-and-living-conditions-Stat-Report-2016.pdf) shows that: in 2016, 30.0% of people residing in Italy were at risk of poverty or social exclusion — 1/3 of the Country. And that makes sense if you are paying about half of your income for a roof, and even more if you are striving to find a room because you can’t access the market.
30.0% of people residing in Italy at risk of poverty
Now, looking at the distribution of income, the numbers I apply to ~80% working force population.
That means that, with a quantitative definition of decent life as housing expenses no more than 30% of your financial return — in spite of job profiles related to high-tech, innovation more or less exponential, start-ups, SMEs, industrial sectors in core economic cities like Milan and Rome — the return of the working time invested in those industrial sector is, for quite large part of the working force, barely sufficient to secure a room in a shared flat.
Conclusions
If there is love, you’re half the way in a decent life.
It is actually better you can share the cost of your flat with ones you love or get along well, because this is not much of choice, but a condition in which a fair amount of population is investing time in working activities whose financial return does not match well with cost of housing.
It jars the fact that part of this population is also involved (or affected by) in working activities increasing proportional inequality to afford decent life-standard.
As network effects of economics, the return of capital ownership grows typically faster than economic growth rate. That means people that do not hold ownership on capital (as a property) but yet contribute to economic growth through their own work, will get poorer at faster rate than their own landlords (or employers). Large portion of capital yields large returns, that can be re-invest in other properties (as in real estate, or companies investing in real-estates, like the company in the intro). Employees contributing to the growth of economic network (such a company, or a region, or a Country) without being able to balance the return of capital across the economics network (across company employees, across citizens) will struggle more and more to cope with property prices. (Airbnb will be a good example showing network effects between who can access return of capital and who cannot).
Within this picture, people are driven to share flats — not necessarily bad, hu! — to cope with housing costs.
The striking point is that the financial threshold under which people need to share flats because they can only afford a room, is very close to incomes that are perceived as lower middle-class, but still middle-class (freelancers, software engineers, web designers, graphics designers, employees in digital SMEs, nurses, PhDs …they all fall in the same bin).
Solutions ?
Yes I have to advance, not in this article.
What about proportion between own income / return of working activity, and renting a whole flat? What about buying a property?
What about other cities in Europe, what about other cities in World:
How much do they have to pay, in proportion of their salary, for housing costs?
Let me know if interested in taking a look somewhere else — and share this with your beloved flatmates :)
