Beware of Lifestyle Inflation When Your Home Equity Increases
Here’s a weird way inflation has infiltrated your lifestyle: through your net worth. According to research, the more your home value increases, the more your budget stretches without you even knowing it.
The Wall Street Journal calls it a blind spot, citing a 2013 study published in the Review of Economics and Statistics . They explain:
Many people spend more when the value of their assets – especially their property – rises, even if in reality those assets often do not increase their purchasing power in the future. In fact, for every $ 1 increase in the market value of a house, certain households increased their consumption by six cents to 18 cents.
If you think about it, it makes sense. When you see your home’s value increase by thousands of dollars, your net worth has increased as well, so you’re more likely to overlook your finances. You are richer!
But not everything is so simple. You will have to sell the house (or borrow it) in order to receive this money. And, as Federal Reserve economist Daniel Cooper explains, you will probably pay the same amount for a house in the same market. So you don’t really get richer if you don’t shrink. Your purchasing power is the same.
Of course, you have the right to spend your money however you want, but you want to spend it deliberately, otherwise lifestyle inflation may take over and you will live well above your means. Cooper offers one final caveat:
Moreover, people shouldn’t think of the house as a tool for making extra money. “If you run out of your home equity line of credit and then house prices change, you are likely to run into financial constraints.”
This is something to keep in mind if you are a homeowner. Check out the full article at the link below.
Housing Price Fluctuations: The Role of Housing Welfare as Collateral for Borrowing | MIT Press Magazines via The Wall Street Journal