How Dream Homes Become Financial Nightmares

The Impact Of McMansions On Your Money

Photo by Erik Mclean on Unsplash

Money buys happiness, but indirectly.

• Financial flexibility = more control of how you live your life.

• Feeling in control of your decisions = happiness.

If we use money to buy more flexibility in our life, we have more control over decisions like:

• Working part-time instead of full-time

• Retiring at 55 rather than 65

• Turning down a job that will make you unhappy

• Taking a vacation this year

• Helping your kids pay for college.

If we define financial flexibility as having excess cash at the end of the month, there are two actions you can take to increase your financial flexibility.

1. Reduce your living expenses

2. Increase your income.

Today, let’s focus on the first point, your living expenses. If you get a handle on your living expenses today, then you will be in a better position to take advantage of future increases in income.

If we are talking about living expenses, there is one line item on your budget that is more important than any other—housing.

Housing is our biggest expense, it’s a fixed expense, and worst of all, we have a strong emotional attachment to our homes, which prevents us from looking at where to live for what it is—the most important financial decision in our lives.

We have bigger homes and fewer people living in them

I live about an hour outside Toronto, in a city called Kitchener. Looking at the kind of houses I see in the old neighborhoods vs. new neighborhoods tells the tale of the housing crisis.

• When I drive around the older neighborhoods in Kitchener, I see a lot of tiny bungalows that were built after World War 2.

• When I drive by the new subdivisions, I see nothing but a sea of McMansions.

This anecdotal evidence is backed up by the reality of the housing market in North America. We continue to build bigger houses even though we have fewer people living in them.

• In 1973 the average house size was 1,660 square feet

• In 2015, the average house size was 2,687 square feet

The average home was 62% bigger in 2015 than it was in 1973. This becomes a problem when we consider that we have fewer people occupying these ever-growing houses.

• In 1971 3 people occupied each house

• In 2015 only 2.5 people occupied each house

We have an increasing population, demand for bigger houses, and fewer people occupying each house. And for some reason, we remain mystified that the price of housing has exploded over the past 30-years.

One of the biggest problems with the housing market is our demand for such big houses. We simply don’t have enough usable land to accommodate a 3,000-square-foot detached house for every family.

If we accept that reality, the logical question to ask is what is causing the demand for increasingly large houses?

Our envious nature and our need to flex our economic status.

The McMansion effect

A 2019 paper by Clement Bellet titled “The McMansion Effect: Top House Size and Positional Externalities in U.S. Suburbs” explains why we have been stuck in this endless loop of building bigger and bigger houses.

Bellet combined data from the American Housing Survey and geolocalized data of more than 3 million suburban houses. every time someone builds a big house, it sets off a chain reaction of the other homeowners in the neighborhood wanting a bigger house too, which they referred to as “The McMansion effect.”

The McMansion effect was strongest in homeowners who (previously) had the biggest houses in the neighborhood. Then, someone builds a new McMansion, and their house becomes the biggest one on the block. Suddenly, the existing homeowners don’t feel so great about their house, which now feels small in comparison.

So, what do the existing homeowners do?

You guessed it, they upscale their houses. Either by buying a new, bigger house or building an addition onto their current home. I see your McMansion, and I raise you a new floor onto my house.

A bigger house can strip all flexibility out of our life

I’ve written in detail why upsizing your house is one of the worst financial decisions you can possibly make.

A bigger home means:

• A bigger mortgage

• Higher property taxes

• Higher utility bills

• Increased maintenance costs.

• More money spent on furniture

In short, upscaling your house takes your biggest fixed cost and makes it even bigger.

A bigger house is a financial anchor tied around your feet for two reasons.

First, it increases the floor on the minimum amount of money you need to make to survive, which in turn greatly reduces financial flexibility.

Maybe you are feeling burnout, and you want to switch from your current high-stress job to a slower pace job that makes less money but is a better fit for you right now.

Good luck making that math work if you just decided to double the amount of money you spend on housing.

Second, it leaves less (if any) money to invest and build future financial flexibility.

Unless you get a promotion or pick up a side hustle, money is a zero-sum game. Every extra dollar you spend on your new big house is a dollar that is not invested. The opportunity cost of spending more money on housing is less wealth and, as a result, a long road to financial freedom.

The saddest part of the McMansion effect

Clearly, you give up a lot to move into a big house, so owning a McMansion must make people pretty happy, right?

Wrong.

Bellet found that the neighbors who upscaled their homes after the McMansion was built reported only a temporary increase in happiness.

Eventually, you get used to living in a bigger house, and it doesn’t make you much happier than you were before. So, no more happiness and less financial flexibility. If that sounds like a terrible trade-off, trust your instincts.

The most important thing to remember about money and happiness is that money buys happiness, but it does so indirectly.

Having more money buys us more control over our lives. It’s this feeling of control and freedom that makes us happy.

The opposite is also true. The more we increase our fixed expenses, the less control and freedom we have. This makes us feel like we are “stuck,” which is a very unpleasant feeling.

One of the best financial decisions you can make is to learn to be happy in the home you live in right now.

Next time someone builds a McMansion down the street from you, understand that you will probably feel envious, and that is a perfectly human response.

Reframe the situation in your mind.

Instead of feeling bad that you have a smaller house, feel good that you have lower fixed costs, which means you have an easier road to financial freedom and control over your life.

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This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

I originally published this post on Medium. It has been updated and republished on Substack as this is the permanent home of all my best work.