Net Wealth

Question: Does an increase in the price of mangoes make you better off?

Answer: Only if you are a net exporter of mangoes, that is if you have more than enough left over to sell after your own consumption. If you do, then the additional mangoes fetch you good income at the increased prices.

If you are consuming all that you have or produce, you have no additional income as you have no additional mangoes to sell after consumption.
If you are consuming more than you have, then you would have to do so by buying mangoes from a mango exporter at the increased price of mangoes.

So an increase in prices of mangoes, is beneficial only to those with the surplus and who can sell this surplus after their own consumption.
The person who is buying mangoes at this time is doing so at an increased cost and is actually worse off.
The person who is consuming just as much as he produces is not better or worse off.

Question: However does an increase in price of homes make you better off?

Answer: Well, if you have just one and you are staying in it, then well not really as you are in a manner consuming what you have and you will continue to do so as long as you stay in that home. A housing boom leaves you no worse or better off if you own a home or are in the process of owning one vide a home loan.

The increase in price of homes makes you better off only if you have more than one home, that is when you have a surplus, just as in the case of mangoes.

The surplus home can be sold and part of the proceeds can be reinvested and part consumed. But in the absence of this surplus, regardless of whether there is a change in price of realty or even housing interest rates, the increase or decrease in prices does not affect the single house owner.
Notionally he can say he is richer in a housing boom, but that richness will never be translated to cash.

The crux is a house especially the one you are living in, does not add to you net wealth. It does not in anyway contribute an additinal income for your expenses, for all I am aware it will continue to make you expend on it.

In business this principle of net wealth is fairly straight forward, but in personal finances most people overlook this aspect. Only if a business does generate a surplus would it be called an asset, in the absence of this surplus it would be termed a liablity.

In contrast a home does not generate a cash inflow, infact it generates a cash outflow. Most single house owners would wrongly call a home an asset, well actually again it is not one as long as you are staying in it. It becomes an asset only if you sell that home.
Infact as long as you stay in that one home it is a liablity.
The liablity arising on account of expenses and maintenance.

If you sell the home, the liablity ceases, and you have the proceeds of the sale as an asset.

Today, most people take housing loans to the extent of 30 years, much of what they earn every year goes into repaying this loan, well the question is how does all this add to your net wealth?
Frankly it does not, notionally it does make them richer in the time of a housing boom, but realistically they still don't come to inherit the increased wealth till the house is sold.

So how does one add to ones net wealth, well anything that one can produce in surplus, over and above your consumption.
Rather if I can say, net wealth is the ability to produce that surplus and not the wealth itself.

Most people would attribute net wealth to the surplus wealth per se.
That too is a fallacy like adding the 'value of a home' to net wealth.
A case in point is inherited wealth, they have net wealth, but since they lack the ability the net wealth will reduce in time.

It is that ability to produce the surplus over and above consumption!
The question is now is what is that ability to make that surplus?