Research shows that financial stress is among the top reasons couples get divorced. So why do we keep overspending on our homes?
In his new consumer education platform, TheMindfulBroker.com, Realosophy's John Pasalis extends the high quality, facts-based education we now benefit from in the areas of personal finance and relationship counselling to residential real estate so that we approach our basic need for a home successfully.
Research shows that financial stress is among the top reasons couples get divorced.
And for most people, housing costs are their single biggest expense.
Does this suggest that the home we buy today may be the first step towards financial stress in our relationship tomorrow?
Based on both the research and what I’ve seen in my practice as a real estate broker, I think it does.
So why does this happen?
One of the biggest risks for a couple buying a home together is overspending. Even though your bank has offered you a mortgage, many buyers quickly find out that what banks are willing to lend them doesn’t leave them with enough money to live a great life.
So Why Do We Overspend?
So the next question of course is, why do we overspend when we know that it will lead to stress down the road? Well, as it turns out, we don’t see things this way in the moment we are making decisions about which home to buy.
The way we buy homes is actually not that different from how we buy any other consumer product. Think about the last time you had to make a decision about stretching your budget on something you really wanted – a pair of shoes or a smartphone. Most us have a momentary internal struggle asking ourselves “should I, shouldn’t I?” We know we want the nicer shoes or phone but we know we can’t afford it.
Those with financial will power will go for the less expensive item while many of us will go for the more expensive one and keep that debt on our credit card until we can pay it off.
While we may not realize it, we actually buy homes in pretty much the same way. Many of us find ourselves in a situation where we find a home we love that is a bit over our budget and face the eternal “Should I, shouldn’t I”? struggle.
Should I buy the home I don’t love as much but feels more comfortable financially or should I stretch the budget and go for what I love?
It’s a valid question – but never a balanced one.
It’s important to know that whether we realize it or not, we are always biased towards the things we want more, the nicer shoes or the nicer house, so the ‘logical’ arguments we come up with will tend to skew towards why we should spend a bit more – as the experts would say: We tend to rationalize overspending.
The 2 Big Differences Between Overspending on a House vs Anything Else
It turns out that it may be harder to justify spending $1,000 on a pair of shoes, especially if it’s a lot higher than what we’d normally pay.
But buying a home is a decision we don’t make as often so we have no baseline numbers to compare, and it is a far more important decision, so it’s easier, perhaps with the help of our real estate agent, partner or parents, to tell ourselves stories that justify a more expensive home.
We say things like:
It’s better to stretch ourselves for the right home than buy a home we don’t love as much.
This will be our “forever home” – if we buy the other home we’ll just have to move again in five to ten years.
This home is a better investment.
This home is safer for the kids because they don’t have to cross the street to get to school (or because the backyard is bigger for them to play in).
Our stories turn overspending from being irrational into the most rational thing in the world.
But when we overspend on pair of shoes or a phone, our worst case is that we have an extra $200 or $2,000 debt that we have to pay off. Once we pay it off, over the next few months or year, it stops impacting your life. It will have damaged our finances in the short-term, but not the long-term.
But when you overspend on a home, even just once, it impacts your life for a very long time. High debt payments take a big chunk of your income every month – whether you like it or not and whether you can afford it or not. You have less to spend on your kids, your trips and everything else that’s important to you.
And it’s this lasting impact that adds stress to relationships.
If you no longer have room in your budget for all the things that make you happy and find yourself arguing over money, what good is the ‘forever’ home?
How Do We Avoid Making the Mistake of Overspending on a Home?
The first step to avoid overspending is to just be aware of the risks that overspending on a home can have on our lives and on our relationships. How much you spend on a home is actually the single biggest decision that will impact whether you feel financially stressed in the years ahead or not – so it’s important to spend some time to ask the harder questions about our finances.
Then, we need to be mindful of the tricks our minds can play on us when we are trying to make a hard decision about a home. Even the most well organized and financially savvy person can fool themselves into overspending in the heat of the moment when looking at their dream home. So before spending way over your budget for your dream home, remember to step back to make sure that the decision you’re about to make is the right one.
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About the Mindful Broker
John Pasalis is President of Realosophy Realty, a Toronto real estate brokerage which uses data analysis to advise residential real estate buyers, sellers and investors.
A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been shared with the IMF and cited by the Bank of Canada and CMHC.
A frequent commentator on the Toronto housing market and real estate consumer and industry issues, John has contributed to the Globe and Mail, CBC, BNN Bloomberg, TVO’s The Agenda, Toronto Star and other media, government and industry organizations. He most recently advised the Government of Dubai on international best practices for the real estate sector.
John holds a B.Sc. in Economics from the University of Toronto and is a candidate in the Doctorate of Business Administration program at the University of Toronto and Henley Business School (UK).
