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House prices, mental accounting, and leaky buckets

A photo of a brain in a jar: Mental accounting explains some of the odd things we think about money

People say odd things about the 100 to 1,500% returns they’ve made from home ownership.

  • They say no financial value is created until they sell.
  • They say even if they did sell they’d only buy another home, so the gains still don’t count.
  • They say it isn’t real money, or it’s funny money, or it’s paper money.
  • House price falls don’t count either, because of the ‘unless you sell it’s not real money’
  • They also say a home isn’t an asset because you have to live somewhere. Useful things can’t be assets? (I debunked this in a different post.)

What you’ll notice if you observe this as only an obsessive property-loser like me could – green eyes pressed up against their fancy bi-fold doors, watching them toast their non-existent mortgages – is how the line varies.

Some clearly do believe their house price gains are real money, because they’ll inform you they foresaw stratospheric rises when they bought a bedsit in Balham in the early 1990s for £20,000 that’s now worth £500,000.

When such gurus speak I get out my notebook and learn all I can. It’s not often you meet prescient financial wizards.

More often, thankfully, I hear the ‘only paper money’ sentiments offered not unkindly as a consolation to people who don’t own their own home.

Yet saying your six-figure house price gains aren’t real comes across as about as self-aware as a supermodel giving tips on succeeding on Tinder by wearing a hat.

What anyone normal sees if you got onto say the London property ladder 25 years ago with a £10,000 deposit and a £100,000 mortgage is you now own an asset worth perhaps £700,000 – a gain far north of half a million quid.1

Agreed, the homeowner will have paid a mortgage on top – but remember the We All Have To Live Somewhere clause.

Non-homeowners pay rent, moving costs, and they go to IKEA, too.

We can quibble about the precise numbers, but given landlords (i.e. professional homeowners) aim to profit from renters, it’s clear owning over the long-term isn’t usually a bigger financial burden than renting a similar property.

The net result is Person A bought and owns an asset worth maybe £700,000.

Person B didn’t, rented instead, and doesn’t.

Yet I’m told Person A is not better off than Person B, because it’s not real money.

Have I got that right?

Mental accountancy: The number of the beast

I’m having fun, but this isn’t really a post about the specifics of house prices, or the rights and wrongs of the market – or even sour grapes!

(And yes, I do still owe you an article on why I did finally buy my own flat. It’s coming. Prepare for an anti-climax.)

Today I’m more focusing on this mental accounting people do.

Mental accounting is why they say their home is not an investment, and that house price gains and losses aren’t real.

Their mental accounting is also what can make them sound so insensitive when they tell you they’re not really better off, because when they sell this £1m property they’ll only have to buy another bloody one.

In reality they could sell-up, rent, and have all that cash in the bank, or in a diversified portfolio of shares.2

But the house equity lives in a different mental bucket, so they rarely see it that way.

Mental accountants I have known

I have a close friend who is of the ‘house gains aren’t real money’ mindset.

Helped by a chunky family-funded deposit, he bought his first flat in a gentrifying part of South London in the late 1990s.

A bighearted person, he has often acknowledged his good fortune in getting help onto the ladder. He even charged me a mate’s rate rent as my landlord for a couple of years, which I didn’t expect and appreciated.

Yet he has shrugged off the growing value of his property assets over the years – even as the equity came to dwarf his other savings and any sensible multiple of his income – due to the ‘needing somewhere to live’ theory.

I saw things differently (increasingly so, as prices got away from me) and said so whenever the subject came up.

Things came to a head recently when he suggested I finally join him on one of his incredibly regular foreign holidays.

I’m also currently single and childless, he said – why not enjoy myself? After all, now I’d finally bought my own flat too I could surely let my hair down.

That – ahem – triggered me.

As tactfully as I could after 20 years debate and several glasses of wine, I pointed out that to buy my flat I’d had to find more than £500,000 from somewhere that he had never had to.

He might not consider his price gains real. But the price rises are very meaningful to someone who has to pay them in today’s market!

In short, he could take a couple of hundred holidays costing £2,500 or so over the next 25 years – maybe 5-10 a year – before I’d be in the same position as him.

Not my finest hour, granted, but there’s only so much you can take of someone saying it’s meaningless trivia that they live in a property that would today cost them roughly 20-times their income before you snap.

His mental accounting met my mortgage budgeting, and there were fireworks.


…it’s actually worse than that. Because I’m sure you saw what I did there.

What earthly reason did I have to set holiday costs against the gains on his flat?

There is no good reason. I was just mentally bracketing them together in the moment to wallow in my martyrdom for a few minutes – and perhaps to get out of an expensive holiday without resorting to voicing environmental qualms or my tightwad tendencies. (I see them more attractively, of course!)

I was fudging the figures for both of us. Instead of his housing equity I could have mentally positioned my investment portfolio against his meager ISAs and booked us both tickets to go.

But sadly I’m only human (my exes may disagree) with the same fit-for-the-savannah mind as everyone else.

And achoring, framing – many of behavioural finance’s Greatest Hits – all featured in that exchange.

More mental accounting

Examples abound:

  • I’ve friends who say they have no savings. Over time I’ve learned (out of concern) most have fairly sizeable pensions. They don’t count these as savings, because they’re locked away for old age. But they are savings. If they didn’t have them, they’d have to start acquiring them.
  • An active investor will sell half of a share holding that has doubled, and consider the residual investment to be free and losable – even though they’d baulk at working overtime for weeks to earn the same amount. See also Las Vegas gamblers and crypto-currency investors after the bubble burst. Sorry, your losses are real money losses.
  • Passive investors will say a market decline doesn’t affect them because they are in it for the long-term. But there’s no guarantee the market will come back – or thanks to sequence of returns risk do it before they want to start spending. If your portfolio halves, it halves. You’re poorer, for now.

To be clear, I believe the passive investing mindset is the right way to go for most.

For that matter I’ve nothing against active investors diversifying out of winning shares, or gamblers resorting to mental accounting trickery to get some money off the table.

The key is to be aware when you’re doing it – because mental accounting can cause problems.

Consider an emergency fund. In my book, that’s a wodge of cash set aside to deal with emergencies.

Yet others will say their emergency fund is covered by their credit cards, or a share portfolio that they’ll sell down if they have to.

Such a strategy to meet cash needs may be right for them (I don’t advise it) but it does not have the characteristics of an emergency fund.

Share portfolios fluctuate, unlike cash.

Credit limits can be cut – perhaps just when you need the cash, and in the worst case for the same reason. And if you’ve just lost your job and need ready money fast is that really the time to go into debt?

Even an allocation of cash in a portfolio that’s mentally accounted for as doing double-duty as an emergency fund might lead you astray.

Perhaps you’ll own few to no bonds because of that cash. Then the market crashes, there’s a recession, you get a lower-paying job – and while you do have the cash to see you through, you didn’t enjoy the counter-balancing benefits you might have had with bonds, because instead you had cash moonlighting in two roles at once.

Worst case is you sell your shares at the bottom, because as you withdraw and spend cash from your portfolio, what’s left comprises an ever-higher proportion of equities that are falling in value, until you get scared you’ll lose everything. If your emergency cash had been mentally accounted for and separate in its own savings account, you might have ridden it out.

The truth is you never had an emergency fund. You had a flawed mental model.

There are also societal consequences of mental accounting.

You might choose to think of your home equity as paper money or not an investment, because you have to live somewhere, or because the costs and time involved in selling make it somehow not an asset in your view.

Fair enough, your call.

But the widespread acceptance of such thinking leads to the situation where as a society we’re asked to have sympathy for cash-poor pensioners rattling around wholly-owned five-bedroom family homes in the midst of a housing crisis, when they could sell up, downsize, and be flush with spending money.

Holding your finances to account

I try to counter my mental accounting with a giant spreadsheet.

This consists of a master sheet that details my best current estimate of my net worth from all sources.

Sub-sheets cover things like my share portfolio, my cash accounts, my unlisted investments, my flat, my mortgage, and other bits and pieces.

Some of the underlying sheets are updated automatically via the Web, others occasionally manually updated by me. The master sheet pulls from all of them.

Like this I can ‘bucket’ my money and investments as our brains seem to want us to do, but I also keep track of the true big picture.

I can also create novel perspectives on my financial status, by dividing various numbers by others. For instance I can work out my own debt-to-equity ratio, my liquidity position, or how exposed I am to property versus shares.

I break out what’s sheltered from taxes, and how, and what’s not.

In recent years I’ve even included an estimate of how exposed I am to different Brexit scenarios via the investments I’ve made (including my flat).

Some of this might seem wonky. But the point is I have many different angles on my finances – conventional and unusual – so it’s harder for me to delude myself.

If you do this, you might realize you’ve got more money tied up in your property than your pension, for example – or vice-versa.

You might see the £5,000 you keep in cash earning 1% that feels like such a drag on your returns is really just a small proportion of your total wealth including all your assets. It may be revealed as a small price to pay for the security of having cash on tap if required.

And if you don’t think your house gains are real money because it’d cost you to move, then fine, apply a discount of 5-10% on the appropriate sub-sheet. That’ll be a more accurate version of reality than pretending it’s still 1997.

Bottom line: However it’s wrapped up, whatever it’s earmarked for, whether it’s easy to get hold of or a right pain – it’s all the same real money.

Share your own examples of mental accounting in the comments below!

  1. In practice you probably moved a couple of times, but of course those wonderfully untaxed gains go with you. []
  2. I’m not saying they should – again, this post isn’t about the rights and wrongs of property ownership. It’s about how people think about it and other assets. []

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{ 40 comments… add one }
  • 1 CMack November 14, 2018, 1:22 pm

    Urg my mental accounting issue is not being able to bring myself to sell my ex-employers stock which is super volatile. I need to just get over myself and sell up to buy a tracker!!! But someone there is this personal attachment to it being ‘earned’ in the course of hard work. Ridic! In better news I have a spredsheet that sounds very similar to yours and its what puts me off further property investment which would have been my go to before I built an understanding of other types of assets to invest in. Thats because I put a lot of money into buying a flat in London (without family help, quite recently!) and so its scary to see the percentage of my net worth that is concentrated in one single (pretty illiquid) asset.

  • 2 Fremantle November 14, 2018, 2:04 pm


    Completely agree with your sentiments.

    Another discount factor to consider for assets is liquidity.

    Your emergency funds should be like the old pre-packed suitcase under the stairs, ready to go at a moments notice.

    Your house is an asset, but not very liquid. Checking the Zoopla value every week doesn’t account for selling costs, inflation or opportunity costs. Holding out for a magic number when selling has a cost. Waiting six months for that extra £20k is equivalent to losing £500 in gains if invested in a 5% return Lifestrategy 60 fund. If it really is in a different bucket, why do people hold out for magic numbers when selling? You’re also missing out on the buyers market that you perceive.

  • 3 coolnfroody November 14, 2018, 2:25 pm

    Simply brilliant, made me smile.

    I too have a “main” spreadsheet.

  • 4 Learner November 14, 2018, 4:09 pm

    Enjoyed this, so I’ll just sheepishly point out the typo in second section: “can makes”.

    I have to laugh when new first time buyers profess to be flat broke immediately after the purchase now that their deposit is “gone”.. then a few months later resume spending and holidaying like before, having realized their net position has not fallen but improved markedly.

  • 5 Stoneme November 14, 2018, 4:40 pm

    Loved this article. Not that I’m a lefty but the tax free windfall that so many house owners have enjoyed whilst the governments of both colours desperately prop up house prices with mad schemes and cheap loans increasingly makes my blood boil. The standard response to scrapping CGT exemption is invariably that it will reduce mobility. Will it really? I’d like to see a study of that. My guess is market forces will come into play and houses will become more affordable, treasury will gain funds and there will be less inequality.

  • 6 Financial Samurai November 14, 2018, 5:00 pm

    Hmmm, my mental accounting snafus probably include thinking “everything tends to do well long term.”

    Unfortunately, it’s hard to not get frustrated in the short-term.

    Hence why I’ve enjoyed owning real estate. Easier to just hold it for 10 years and see what happens.


  • 7 W Neil November 14, 2018, 5:25 pm

    Downplaying home equity gains because you live in it so it doesn’t count. The fact that the equity can be used as security to finance further property investment suggests it does count.

  • 8 xxd09 November 14, 2018, 5:34 pm

    Hi Investor
    Not buying a property all those years ago has left a deep scar
    Who could tell that property would take off as it did
    Life is seriously not fair!

  • 9 The Details Man November 14, 2018, 5:43 pm

    All numbers in a spreadsheet appear equal. Some are more equal than others.

  • 10 Andrew November 14, 2018, 6:06 pm

    You sound bitter, like someone who missed out on buying Amazon, Apple or Google in the early 2000’s and complaining about it.

  • 11 Vanguardfan November 14, 2018, 6:27 pm

    The fact is, virtually nobody who has never lived in London can afford to move there.
    That’s a huge problem and makes the regional inequalities self perpetuating.

  • 12 The Investor November 14, 2018, 6:30 pm

    @Andrew — Hah, yes I probably do and I am a tad but it’s a bit more complicated than that. (I think I’ve gone through the Seven Stages of Grief! 😉 ) There’ll be a bit more context in my upcoming flat article. Ultimately nobody but myself to blame for the fact I never bought, but with that said I don’t think it’s the same as not buying Amazon, Apple, or Google. Housing is something everyone has to have, it is core to the economy, and supply is necessarily constrained. Food and perhaps fuel prices (for the majority who drive — I don’t) might be similar.

    Not going to reply to much more on house prices on this thread though, as better the focus remains on mental accounting. (A relevant comment — which I mention in the piece — is how mentally “anchored” to those depressed prices of the early 1990s I first encountered.)

    @Learner — Cheers for the typo spot — fixed now! 🙂

  • 13 Quitting Teaching November 14, 2018, 6:34 pm

    When these “not real gains” on your house price pushes you into a lower LTV mortgage bracket, then the gains you have in lowering your bottom line are definitely real…..

  • 14 LadsDad November 14, 2018, 9:27 pm

    Great article, got me thinking…

    I’ve always corrected a family member who states “I dont need a pension, my house is my pension”.

    To which I always retort: “But you need somewhere to live in retirement…”

    Perhaps we’ve both got the wrong end of the stick! (They still need a pension).

    I’ve also fallen into the trap of refusing to sell employee Sharesave shares until they hit an arbitrary price of £x.xx. Strangely this mindset doesn’t occur for index funds in my ISA.

  • 15 Caveman November 14, 2018, 11:07 pm

    So I completely agree we all have mental models of the world (whether that’s an accounting model or something else. But actually in a world that’s complex that’s what we do, what we HAVE to do, to keep it manageable.
    If you were an economist you might describe it as version of bounded rationality. The rest of us call it rules of thumb. Your spreadsheet is an attempt to be a rational, utility maximising individual which is what we should all be. But, for most people that is just to much effort.
    So, to extend your example. Instead of looking at a home as an asset and so rationally calculating if they should divest it and invest the money elsewhere to be better off overall, most people shrug their shoulders and come up with the reasons you have above. It’s just far less exhausting.
    If you didn’t limit your analysis it’s not just your home you need to think about its your job, its the trade off of time with friends time to time spent on your hobbies, it’s working out the true opportunity cost of each decision. It’s the logical thing to do but for most people the cost of calculating the right thing to do is too high, so you make decisions from your gut or rely on your mental models to keep you (mostly) on the straight and narrow.

  • 16 dearieme November 15, 2018, 12:36 am

    My mental model is simple.

    By far our biggest equity investment is our house. In fact at the mo’ it’s damn near our only equity investment. Our bond investment is about zero, plus the present value of the sum of all our pensions, DB and State. Our “financial portfolio” is dwarfed by those: its importance lies not in its size but in the fact it provides all our liquidity.

    The trouble is that the good ship Dearieme is horribly exposed to enemy action: a collision with a mine labelled ‘one of you goes into “care” while the other is still alive’ would have her taking in water. The house can pay for the survivor going into “care”, but what the devil is going to pay if I have to go into”care” while my wife is still alive, and what is she going to live off?

    I suspect that the problem can’t be solved in the absence of a suitable insurance market. Or rather can be solved only by equity release. Anyone who expects to become old should buy a house as a future candidate for equity release. Be sure to tell your friends, TI.

  • 17 Learner November 15, 2018, 12:44 am

    Mental accounting seems to apply to debt too. In the US, I’ve heard people say they’re resigned to paying $500/month for their financed vehicle(s) essentially forever. That a 5 or 6 figure student loan doesn’t really count because it has a special status in credit assessments. It’s a way of life.

  • 18 Bill G November 15, 2018, 1:54 am

    Gold sovereigns anyone? I have a handful of the coins in a twist of paper (worth almost £2k when I last check with Spinks).
    These do not return any interest or dividend, they can be easily mislaid or pinched, and I never mention them to my IFA, yet I feel much happier knowing that they are there.
    The worst thing is that I have sold and repurchased them three times now (to fund deposits, cover unpaid invoices, etc).
    The opportunity cost is fearsome. But in my mind they don’t count as an investment, they are simply there.

  • 19 Fatcat November 15, 2018, 4:21 am

    I agree with Caveman. I suspect most of us here and our spreadsheets are just considered nerds by the general population.
    Whether a blessing or a curse, I’ve always recognised the places I’ve owned are an asset with the corresponding liability of a mortgage as applicable. If you have any sort of financial plan to do anything unusual (retire super-early, become filthily wealthy, travel for years) as many of us do- how can you not?
    My current mental accounting quirks:
    Bad: Same company sharesave reticence as others above (wonder if we all have the same crappy shares?)
    Good ( I think): I have some high-yield P2P investments for which each month I value. I take typically a third of any increase and stow it away in a dusty corner of my spreadsheet and don’t count it in my net worth. This lessens the pain of inevitable defaults that come my way.
    I also have savings ‘buckets’ for things like a future car, a big wedding gift for close family, and even expensive furniture. All of this really is just part of my wealth, but in my mental landscape is not part of my wealth any more than the tenner I’ve already spent in the pub, as I consider it already designated to spend. Whatever works, eh?

  • 20 The Shrink November 15, 2018, 8:52 am

    Great observations TI.
    Mental accounting IMO seems so often to be a psychological defence mechanism (but then I am biased). A house is probably the largest investment that most people will ever make in their lives where their choices define the outcome (pension contents often being outside of their control). Thinking about it as a cold hard number can be scary; it crystallises the reality that your house choice, often driven by emotive factors, may cost you multiples of your yearly earnings if you, for example, picked the wrong postcode. People don’t like to accept that level of responsibility. Much simpler to think of it as ‘not real’.
    I’d also say from my own experience it’s much more difficult to mentally account a house sale/ purchase. It’s so personal. You may have a hand-picked basket of investments, but their price is determined by all the factors in the efficient market. You can absolve yourself of responsibility for that price. Your house on the other hand is a big illiquid lump. Zoopla might suggest it’s worth has increased 40% in five years of ownership based on next door selling last year, so you have that on your spreadsheet. A bitter pill to swallow when you come to sell to find your furry feature wall means you have to knock down the price 5% compared to next door. Even worse if the sums suggest that 5% is your yearly take home. Much easier to say ‘it’s funny money’, and not accept you’ve got shit taste.
    This is already an essay, and I’ve not even touched on subconscious stress reduction!
    Suffice to say our equity is in my spreadsheet, updated quarterly, and that’s the only time I try and think about it!

  • 21 MrFive2Fire November 15, 2018, 11:02 am

    The difficulty with looking at a home as an investments is that it doesn’t take into account the emotional attachment. There is no other asset you could go to sleep safe in the knowledge that your doors are locked and it doesn’t matter if it rains because you won’t get wet. You can’t do that with facebook stock or Bonds or any other investment.

    Property as an investment (a.k.a buy to let) is that you pay taxes on the rent received (minus expenses) and only pay the capital gain once sold. Looking at it from a tax point of view its easy to see that the tax on your capital is only payable when you sell. As you don’t receive rent from your main home (excluding lodgers airbnb etc) its easy to see how the common view is that the money you put into your house doesn’t count. I would go as far to say as my view is that the price of my house only matters when I want to remortgage or when I’m selling. The only time that the price of a house matter to me is when I want to buy one. Anything else is just the fluff around the edges.
    I found that looking at my home, and my investments this way, allows me to ride the market volatility. So now I don’t sell at the bottom and buy at the top, I take a different, longer term view.

  • 22 Steve November 15, 2018, 11:05 am

    The main difference in buying and renting is down to how long you live,if you pay a mortgage for 20-25 years it is usually a bit more than rent per month and you have to stump up a deposit.
    But that deposit increases in value by approximately the full 8% per year (average property price appreciation) and the mortgaged bit appreciates by 8% minus your mortgage rate.
    If you live to 75 plus you will pay your rent for at least 50 years,and it will constantly go up with inflation,your mortgage could also go up but the price you originally paid is locked in,
    Also if mortgages go up I can virtually guarantee rents will go up.
    so if you rent to beat buying you will have to earn more than 8% on that deposit amount you haven’t had to pay and do exceptionally well on the monthly difference of payments.
    Your mortgaged amount if buying gives a exposure far greater than you could get in the stock market because you have borrowed such a large amount at such a cheap rate and netted 6% (8% – 2%) roughly for 20-25 years and gradually shifting more of your earnings over to the full 8% as your capital grows.

  • 23 Jonathan November 15, 2018, 11:20 am

    The mental challenge is balancing the estimated value of a house with the challenge that it has such poor liquidity. Plus the fact that most people have inflated ideas of property value for bragging purposes (finding the most expensive sale of a more or less similar house on Zoopla, which might be in a vastly better location or have enough garden to provide an additional building plot). We know plenty of people who have had to make huge reductions in headline price to sell their house when they needed to.

    But I admit I find it difficult. I tend to think of my investments as those I have short term control over buying and selling, and although I do include our home on an overall spreadsheet of assets I don’t attempt to value either my or my wife’s DB pensions. But in the case of my mother who has recently gone into a care home and for whom I have power of attorney a notional house value is definitely part of the assets I am keeping an eye on.

    If you were planning investment strategically you wouldn’t think of having a very large part of your assets in a single illiquid and fairly volatile investment. However if you compare the price of buying a mortgaged home with the renting you would have had to do anyway, while it costs more if you account properly (at least initially) you are effectively putting that extra money into a very cheap annuity that will pay a good proportion of your housing costs after retirement. Just don’t rely on short term gains any more than you would with a share investment.

  • 24 Mathmo November 15, 2018, 11:24 am

    Good insights, TI. I run a similar spreadsheet (when asked how to run finances recently, I advocated focusing effort on ones I&E (earn more, spend less, reduce fees), but tracking ones balance sheet). Flat and mortgage in same subsheet, eh? One is an asset, other is leverage for whole portfolio. Beware the net asset. 😉

    Property is a special asset, of course. Nothing else gives such a big market for leverage (margin loans are hard), nor immediate tax relief on your first one. It also (cause?) Has huge political implications because “Britons deserve to own their own home” is an odd national quirk that we seem to have picked up. I don’t the need to own my own train, and am perfectly happy to rent that by the day. My sixth car is an Uber.

    I keep a matching income and cost line in my budget for “imputed rent” — ie the cost to me of living in the houses I occupy instead of either renting out and renting somewhere smaller myself. It’s a sobering number as it keeps you aware of the massive cost of shelter, even if you are both supplier and consumer.

    Ps — I do wonder about the term “housing crisis” — there is a building and transport crisis at worst. You don’t have to live in zone 1 to have a job.

    Pps — having now looked more closely at how developers are getting round affordable housing provision, in order to make money out of ruining swathes of our collective countryside environment and promote urban sprawl, I’m more sceptical than ever about property.

  • 25 The Investor November 15, 2018, 11:46 am

    Flat and mortgage in same subsheet, eh? One is an asset, other is leverage for whole portfolio. Beware the net asset.

    Fully agree, and indeed the mortgage is tracked as its own entity not netted off against my flat’s value — clumsy writing on my part above, and I’ve amended cheers! 🙂

    I definitely think of it as leverage against my whole asset base. (Indeed that was a major reason for getting it!)

  • 26 Factor November 15, 2018, 12:43 pm

    @TI – “….. cash-poor pensioners rattling around wholly-owned five-bedroom family homes in the midst of a housing crisis ….. when they could sell up, downsize …..”

    I am one such for my (reward for many decades of family-orientated hard graft) “sins”, and yes I could downsize but I don’t intend to. Why? Because I live where I had always aimed ultimately to live, in a quality rural environment, in a close-knit quality neighbourhood, amongst quality neighbours with whom I share similar values and civilised modes of behaviour, including a friendly tolerance of the occasional difference in political leaning. No grime, and no crime. Quality of life.

    Were I to downsize, I would lose much if not all of that, and there would no longer be the “smile on my face” that wakes me every morning.

  • 27 The Investor November 15, 2018, 1:28 pm

    @Factor — I can understand that, and I’m not saying you should be compelled to downsize. 🙂 I am just saying I don’t think that society should be compelled to feel sympathy for people in such a position who are also low of cash (let alone give tax breaks or other assistance you sometimes see requested.)

    @everyone — Great discussion, and I’m loving the various examples of mental accountancy. Kicking myself that I didn’t include student loans into my example list myself as I’d meant to. (“It’s not really a loan, it’s a tax”. No, it’s a loan, a debt, that has some characteristics that can make it useful to sometimes think about it as a tax.) Definitely also agree that mental accountancy has its uses. I’d probably struggle to ever be free of Buffett’s Folly without it. 😉

  • 28 Mathmo November 15, 2018, 2:02 pm

    @Factor — sounds idyllic – well done!

  • 29 Steve November 15, 2018, 5:48 pm

    A slightly different view I hold is that when you are born you are short on the housing market,you are short by one house,you will always need one house and its best trying to right this wrong as early as possible.
    Both the housing market and stock market will both march on with or without you on board,they are both very similar investments as regards returns,but are not necessarily in step with one another.
    But if you don’t invest in a property you are still short by one roof over your head,and this costs you every month you are out of the market,it’s almost like you are short on property .
    The geared exposure is important also,£200,000 exposure for £20,000 it really is the only place ordinary folks can get that kind of gearing at such a cheap rate on such a secure asset.

  • 30 Factor November 15, 2018, 6:02 pm

    @Mathmo (28)

    Thank you – kind of you to say so.

    Labouring up the hill, pushing the unforgiving rock, I never once allowed myself to “lose sight” of the view I would get from the top. It was all worth it : )

  • 31 old_eyes November 15, 2018, 6:02 pm

    I also have a master ‘wealth’ spreadsheet. There are two things that are not on it; the ‘capital’ value of my defined benefit pension, and the house.


    I never put my annual salary down as wealth ‘cos it could stop tomorrow. Similarly, I could die tomorrow and the DB pension would not be part of my estate. There is a limited income for my partner, but that dies with them.

    The house is mortgage free, an asset and part of my wealth, but in practice highly illiquid. What is it worth? Who knows? I live in a rural area where houses sell infrequently and each one is different. Zoopla’s current estimate appears to be the price we bought it at unimproved, inflated by CPI since purchase; not even average house price inflation for the region. Is that right? Who knows? So until we come to sell it has a very vague value.

    We don’t currently plan to move, but since we are rural, we have to recognise that we might need/want to downsize to a town. My mother is 90 and manages completely independently because she lives in the middle of London (renting) with all she needs close at hand. At that point, we would need to buy or rent. Taking both Zoopla’s estimate, and my own somewhat higher estimate, of value and looking at buy/rent in my nearest quality town (with the facilities I think I would like/need) I could afford to buy but not rent the kind of property I would want on a 4% SWR on the capital released by selling current property.

    So my mental model is that I need to invest the current value of my property in somewhere to live until I snuff it. Assuming my partner outlives me, they would need to do the same. So thinking about the value as part of my wealth does not enable me to make any useful decisions today. Yes, I could mess around with imputed rent and all sorts of fun things, but it would not change my investment/spending decisions.

    So I can add the two large numbers of the capital value of my pension and the value of my house to my wealth. Makes the number look bigger, but what do I do with it? With a paid for house and a pension we can survive on, we have our income floor (see earlier Monevator articles) sorted. The investment and savings side is for oh shit! and fun. I know I am very lucky, but that is how it is for us.

    My mental accounting failure is that, even though it doesn’t matter all that much, a drop in the more liquid part of my wealth still hurts. But then I never claimed to be rational 🙂

  • 32 AAJ November 16, 2018, 12:13 am


    Your first point isn’t true. What you said was “mental accountancy”. It would be better to live outside London, investing in a property that is likely to rise in value faster than London and then to move to London.

    Living in London and renting would make buying in London more difficult. There is a high churn of Londoners. Each year thousands move out and are replaced with people moving in.

    Homes are affordable and people are generally able to sell them quickly and easily.

  • 33 Christian Graham November 16, 2018, 9:59 am

    My current favourite form of mental accountancy relates to the time of year. The autumns and winters often seemed to drag on for months – but now they don’t.

    Why? Because the clocks going back offers an extra hour in bed during which I reflect that it is only a month or so until the winter solstice and the days will start lengthening again. Further over the next month or so, I’ve scheduled a few long weekends to lengthen the breaks in my already part-time week. That means I can be outside and appreciate what daylight and hopefully patches of good weather that there is.

  • 34 Brod November 16, 2018, 4:44 pm

    Not sure I agree with this it’s illiquid/my house is not an asset argument.

    Say you needed one of those fabled private surgical operations – could you somehow use your housing wealth to provide the capital by selling or borrowing against it? Of course you could. Therefore it’s an asset.

    Or is it cheaper that renting the equivalent property? Or will it eventually be? Yes, then it’s an asset yielding the differential. Therefore it’s an asset.

    Does owning a the house give you pleasure and comfort and security? Yes. Therefore it’s an asset (that bit’s hard to value, granted.)

    Just because it’s illiquid or hard to value, does not mean it’s not an asset.

    And the same goes for DB pensions. Sure, you may not be able to transfer the capital value, but it is exchangeable for goods and services (you know – food, heating, light, clothing and any other stuff you may want/need) and it may free up other assets to be used in other ways (the “luxuries”). And if the value transfers to your spouse, that even negates any argument about transferring DB pensions.

  • 35 old_eyes November 16, 2018, 5:26 pm

    @Brod. I did carefully acknowledge that both house and DB pension are assets (of different types). My point is that I do not book them to wealth, because doing so would overwhelm my other wealth and would not offer me any new decision insights. I don’t monitor my wealth for the sheer emotional glow of so doing (although I admit it gives me a mild frisson of pleasure), I do it to decide what to do next, whether that is an extra holiday, some new gear for my hobbies, decorating the house or choosing an investment.

    Proportionately perhaps 10%-20% of my total asset value is available to manage and take decisions on (absent the kind of catastrophic health or legal problems you refer to). Why have a dial where you are squinting at 1/10 the arc to see what is happening, when you could expand the interesting bit to full scale?

    Of course if I am making a will or talking to a financial adviser I mention the house and pension, but it is just not interesting in terms of managing savings.

  • 36 SemiPassive November 16, 2018, 8:06 pm

    Well I have my home on the net worth spreadsheet despite what Robert Kiyosaki says about non-rental property being a liability rather than an asset.
    So with you there. It gives you options, you can sell up and downsize to free up equity, or even rent or live in a camper van. You can even UPsize – but downvalue – by moving from London to the country. Win win.

    Houses may not directly put money in your pocket in income terms, but then neither do capital gains on shares. And you’re not paying out on rent, so once the mortgage is cleared there will be a big and permanent improvement to your cashflow.

    I think it can be dangerous to pin all your retirement hopes purely on downsizing as many do, but if you have more house than you need then you can sell up and put the difference into income producing assets.
    So it is tangible, real wealth. Why do some people say otherwise – probably a mix of false modesty and ignorance in most cases.

  • 37 dearieme November 17, 2018, 12:29 am

    “Of course if I am making a will or talking to a financial adviser I mention the house and pension, but it is just not interesting in terms of managing savings.”

    Illogical: it tells you about diversifying. Where is your house? Where are your pensions paid? Both UK? Right, diversify by investing much of your portfolio abroad.

  • 38 Richard November 17, 2018, 4:32 pm

    isn’t a lot of the house price gain issue because most people don’t track the equivalent rent they would have to pay. Their house is worth 500k more but their lifestyle is the same as it was before. So they feel no wealthier than they did before. It doesn’t feel real. Unlike gaining 500k in your portfolio which would yield say 20k extra income a year which would have a major impact on your life. So I can see why people naturally fall for that mental gymnastic. Plus you don’t want to appear to be boasting about your vast wealth (inevitably someone will want a cut of it).

    But of course it feels insensitive to someone who now has to find an extra 500k to buy the same house.

    My issue is perhaps the opposite of the above – one of holding too much cash – so afraid of losing job or some other unforeseen occurrence. I convince myself it will happen and it will be a disaster when it does.

  • 39 old_eyes November 18, 2018, 5:21 pm

    Dear All,

    The challenge set was to talk about our own mental accounting procedures. This I did; saying that although I understand the contribution to my wealth of DB pension and mortgage free house, I choose not to include it in my investment and wealth spreadsheet as it does not help me to make decisions. It sets an important context for the purpose of further savings and investments, but that context is stable outside a high impact low-probability event such as DB pension provider going under etc.

    The way I choose to look at things helps me to cope with volatility, setbacks and to be clear on my strategy. What I have learned from Monevator over the years is to understand what your objectives are and why, develop a resilient plan to achieve them (in my case passively), and stick to it. My approach focuses on that.

    I do not claim that my mental accounting is optimal, just that it works for me. All of us must find our own story about what we are doing that makes sense to us and helps us to deliver.

    Some of you find my thinking incorrect and my logic faulty. That’s fine, but to me misses the point. There is no absolute and correct approach to financial planning and investment, but we know many ways to get it wrong, driven by the mismatch between our instinctive ways of thinking and what ‘rational economic man’ would think. For all of us, it is a question of finding an approach that helps avoid the more obvious traps and to make decisions that trend in the right direction.

    Therefore I am less interested in your critique of my mental accounting than I am in what stories you tell yourself to justify your mental accounting. For mental accounting is definitely there.

  • 40 Gentleman's Family Finances November 23, 2018, 2:44 pm

    Great Article!

    The unearned wealth from property is so badly accounted for in people’s heads.

    They think that they have wanted it or worked hard – even though I have relatives who have not worked in 20years but saw their house warming enough to keep them holidayed up and full of prosecco for years now.

    They think that the youth are lazy or ungrateful – but won’t admit their luckiness.

    I managed to sell my first flat for twice what I paid for it in 8 years of ownership. Lucky me? But if I had havr bought 2 years earlier it would have been a 3x gain in 8 years.

    Am I lucky? Unlucky?

    Well – there are swathes of the UK which have not seen house price inflation since 2006/7 and others that have had prices just taken off! For many many people – high houses prices not coupled with high house price growth means that they are in a terrible. Financial position (even after 10 years of rock bottom interest rates).

    And the young millenials are in an even worse position- it makes you despair!

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