Bigger isn't always better: The hidden costs of oversized homes

Clément Bellet, Assistant Professor at Erasmus School of Economics, recently published his research findings in the Journal of Public Economics, where he explores a curious paradox: while homeowners in larger houses report higher satisfaction with their own properties, overall satisfaction across entire suburbs decreases as average house sizes grow. This puzzling trend isn’t about dissatisfaction with neighborhoods themselves—it’s specifically tied to how people feel about their homes. So, what’s going on?

Positional externalities

‘The answer lies in our tendency to compare ourselves to others—what economists call “positional externalities”. In other words, people’s contentment with what they own diminishes when they see others with more or better possessions. While this phenomenon has been well-documented in controlled lab settings, my research provides the first strong evidence of its existence in the real world—specifically in suburban America, where homes are a highly visible status symbol.’

Exposure to other McMansions

‘I examined what happens when existing homeowners are exposed to the rise of McMansions—those oversized homes that have become a common feature of U.S. suburbs. Given that American suburbs are designed for car travel, visual exposure to these large homes happens mostly during daily commutes. By analysing data from three million homes, I found that homeowners who frequently see these oversized houses report lower satisfaction with their own properties, especially if they already live in large homes themselves. Interestingly, smaller homes don’t trigger this reaction. It’s not just about having a big house; it’s about seeing how much bigger your neighbour’s house can be.

Even more revealing, McMansions that are tucked away, out of sight, or were built before the homeowner moved in don’t have the same impact. It’s the constant visibility of these giant houses that triggers feelings of dissatisfaction. These findings likely apply to the Netherlands, where the average home size remains higher than the European average, although Dutch homes have become smaller in recent years due to the housing shortage.’ 

Why does this matter?

‘For economists, this phenomenon has real-world consequences. These positional externalities don’t just affect feelings—they shape behaviour too. Homeowners exposed to larger houses are more likely to expand their own homes, taking on more mortgage debt in the process. In fact, for every 10% increase in size of nearby McMansions, homeowners extend their homes by an average of 1.2% through additional loans. This race to keep up with the Joneses contributes to unnecessary financial strain and may diminish overall welfare. These effects may also reinforce the housing crisis in countries like the Netherlands where housing supply is limited. Indeed, rather than sharing an equal amount of space among the population, positional externalities lead to a concentration of housing space at the top of the distribution.

Policymakers could use this information to rethink zoning laws or introduce maximum lot size requirements, helping curb the pressures that lead homeowners to upscale unnecessarily and take on more debt.’

Why should marketers and consumer researchers care?

‘These insights extend beyond housing markets. The same principles can be applied to any industry where luxury and upgrades are key motivators. Just as homeowners feel the pressure to upgrade when exposed to larger homes, the same principle likely applies across industries—from smartphones to cars. Platforms like Zillow can capitalise on this by highlighting the largest, most glamorous homes, encouraging buyers to stretch their budgets. But this strategy isn’t without its risks. Just as homeowners regret their expansions when a new McMansion pops up, consumers could quickly lose satisfaction with their purchases once even bigger or better models hit the market—a cycle familiar to anyone who’s tried to keep up with the latest tech releases.

Understanding these dynamics can help brands and policymakers alike navigate the delicate balance between consumer aspirations and long-term societal welfare.’