When your home increases in value, you start feeling richer even if you aren’t
There was an interesting study from the Reserve Bank of Australia (RBA) in 2015 when they showed that each time a house rose in value by 1% from the market, there was a half a percent increase in new car purchases.
BUT THE HOUSE IS STILL YOUR HOUSE
By this.. I mean that you aren’t going to sell it to finalize or realize the gains, are you? You still have to live somewhere. Even if you sold your home today, you would have to rent somewhere, and/or buy a new home elsewhere. The prices have all gone up if you want to stay in the same area, so really, you’re just exchanging wealth, or getting a larger home and/or mortgage.
An increase in your home’s value, actually means nothing to you unless you plan on selling and then perhaps moving away to a lower cost of living area, or renting with the proceeds.
SO WHY THE NEW CAR THEN?
It’s all psychological I think. You feel richer when you are told – hey your $250K home is now worth $300K! Even if you haven’t sold it, you’ve mentally tacked on that extra $100K to your home’s value, and feel entitled (?) to match it with your other lifestyle upgrades – car, schools, clothing, grocery bill, takeout, etc.
You FEEL richer, so as a result, you feel like you have more wealth to spend.
The perfect example are my parents. They have $1M in home equity, but barely anything saved in the bank. Are they rich? Not in my eyes they’re not. Unless they sell that home and rent, to live off the proceeds, they aren’t rich. They’re HOUSE rich, but cash poor. And yet… my parents FEEL rich. In their heads, they have $1M locked in as their net worth and they feel thrilled to bits.
HOME EQUITY = MORE BORROWING POWER
Another reason why you may feel richer is you are going to be able to borrow more. Now that your net worth is higher, banks might be calling you a little more often to offer lines of credit, credit cards, etc. You may also think – hey I have a $1M home! Now I can take out a Home Equity Line of Credit (HELOC) against it, and the higher the home value is, the more HELOC I can take to reinvest back into the home by renovating the kitchen, bathroom, etc. Or even to use the proceeds to treat yourself to a vacation.
All of this is a dangerous slippery slope of debt. When used wisely, HELOCs make a lot of sense, as long as you have a plan to steadily pay it back and not use it as a cheaper form of credit (versus credit cards for instance). Remember that if you don’t own your home 100%, the bank owns it.
WHAT ASSETS YOU HOLD ALSO HAVE AN IMPACT
If you bought crypto and it was rising, you felt rich AF. Now that it’s crashing, even if it was 10% of your portfolio, you are likely to feel WAY poorer than before, just because you were fixated on what had boosted your net worth so far, and now is crashing down.
Or, if you dabbled in meme stocks like GameStop (GME). When it was rising, everything was gravy, maybe you sunk another $1000 into it, and now that it’s tanking, it’s starting to feel like you’ve lost it all.
UNCERTAINTY IS THE KEY
If you feel poorer, even if it isn’t true at all, you are likely to want to rein in your spending.
Same goes if you feel richer – you will want to go hog wild when you feel like you’re flush.
Any of this, can be either perceived or real, and the main thing is that feeling uncertain about your financial wealth can instinctively make you want to start hoarding money, and cutting back, even though it is not necessary.
IS THIS WRONG?
Not really. I mean, technically it could be true that you really are richer, or maybe you have been trapped in a scarcity mindset your whole life, but just knowing you have a $1M house, has allowed you to finally release those chains of mental poverty, and begin spending a bit of that money you have been hoarding.
More than likely however, is you are not in the 10% of money nerds who frequent this blog and money communities in general (lol), and you MAY be in the position to think you are richer when really you are not. That is perhaps a where it might be wise to pause, do a net worth calculation and remove your home (and cars, for that matter), so that you focus on what you actually do have in the bank that you could sell and use as proceeds to live on; you can’t eat your house or your car.
I guess it also ties in with the whole notion that if you dress well, it makes you feel like you are living a more luxurious and expensive life, even if your bank account is at $0. It’s what’s on the outside that seems to matter or make you feel better, based on the perceived reactions or notions of people observing you in real life wearing said luxury items. It can be a catch-22.