Blogs | March 1, 2012

Should I buy a new house?

Scott asks: New houses are being built in my street and my partner wants to buy one. Should I agree?

Ian answers: The decision to buy a house depends on a many personal factors. In your longer question, you note a new child is expected soon, that you have significant equity in your existing home, that both you and your partner are comfortable with your current house and have enough room for another child. The new houses being built are larger and the developers are offering financial incentives both to help sell your existing property and to buy the new one.

It’s not about the money
We could evaluate the finances, explore your attitude to taking on more debt and examine whether house prices are cheap or expensive till the cows come home but that does not seem to be the driving force behind your question. You could afford the move, but are not sure whether this is what you want.
Emotions rather than finances appear to be playing a key role in your decision. Behavioural economists might say you are being influenced by peer pressure and the way positional goods affect spending.
The new houses being built within sight of your front door appear to be changing your perception of what is acceptable. Even though you do not yet have new neighbours, you appear to be drawing a mental picture of what it will be like not to live in the largest house in the street, when previously that was your situation.

Following friends
Peer pressure – or the tendency to follow behaviours similar to those of similar or close people - plays an important role in the way we spend. Researchers in Holland found that if someone won a new car in that country's regular postcode lottery, their neighbours were more likely to buy a new car, even though they had not won a prize. You may be facing a similar situation. The new houses may be sowing the seeds of discontent in your current position, which appears to have served you well till now.

Keeping up appearances
Another way to look at the situation is that your position (hence the term positional goods) compared with those around you is changing. Because you will no longer have the biggest house on the street, some may think you are not as successful as your neighbours. It would appear as if you can’t afford the big house.
Of course, there is a lot of potential nonsense in that thinking. Nobody knows whether the owner of big house lies awake at night worried about how to pay the mortgage each month while the owner of the smaller house sleeps well, secure in the knowledge that the mortgage will be paid and money is being put aside for the future.

Future focus
And perhaps it is the future you should be focusing on more now that a new child is on the way. Children can bring much happiness but they involve long term emotional and financial commitment. Having a little extra money each month but a smaller house may be a good bargain.

EmotionHouse buyingPeer effectsHouse prices

Ian Bright
Ian Bright

Senior economist at ING
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