In reply to Bayard's question about why people spend so much on housing.

From here

Me: If your point was that land prices are the inverse of interest rates and/or proportional to credit availability, you are clearly correct.

Bayard: Yes, but why? Why do so many of us spend more on land when we have more to spend? We don't tend to spend more on food, cars or holidays in quite the same way. Most people walk into a car showroom with an idea of which car they would like to buy and try and buy it for the least they can. The same people walk into an estate agent's with an idea of how much they have to spend and try and get the best house they can for that money. That's the quirk.

It has something to do with marginal utility.

For most people on OK incomes, mass produced stuff like cars, food, holidays, are all relatively cheap. Everybody has their own preferences about how to split their money between cars, food, holidays.

Let's take cars, some people want to have the shiniest, newest model, whatever it costs, but most are are happy to buy second hand (most cars are bought and sold several times, so most car purchases are second-hand). Those people get less enjoyment from buying a car that costs £1,000 more than they would from spending that £1,000 on something else.

That car is their "ideal" car, and for most people is easily affordable. For me, the "ideal" car costs about £2,000, anything more than that is money down the drain (repairs, on the other hand...). Even if I earned three times as much, the £2,000 car would still be my "ideal" car. (Knowing me, I'd just buy more £2,000 cars. MGF is next on the list).

Housing on the other hand is incredibly expensive, bearing in mind how long ago the bricks were piled up and how little ingenuity it took to do so.

Each household's "ideal" home is the home where the extra enjoyment from buying one that costs £10,000 more would be less than the extra enjoyment from spending £10,000 on something else. And for most people, this "ideal" home is way out of reach, financially, they simply don't have the extra £10,000.

So our only choice is to pare back 'other spending' and set our housing budget as all income not needed for 'other spending' - and then spend all of that housing budget on getting the nicest we can afford within that budget.
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There's also the point that people assume house prices will go up and up, so they don't really view it as a cost, they see housing as an "investment" which generates capital gains and income (which it does, or at least, it saves paying rent). On that basis, spending every last penny on housing makes sense from an individual's point of view.

From the point of view of society as a whole, it is madness because we are all trying to outbid each other and so the monopolist (the land owner) is the only winner. If an entire generation of tenants and first time buyers formed a cartel and agreed that none of them would spend more than 10% of their income on rent or mortgage repayments, then they'd all end up in the same homes as they would have done but at one-third of the current cost.