Is it a good thing for very wealthy people to live in wealthy enclaves?

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Researchers from the University of Warwick and the London School of Economics recently published another clear example of Britain's north-south divide. It found that some residents of the Notting Hill area in west London pay more in capital gains tax than the people of Liverpool, Manchester and Newcastle combined.

Perhaps one advantage of this is that if you live in Notting Hill, you can easily find well-heeled people in your local pub to share your stories of CGT woes. But it also raises interesting questions. Is it a good thing that your neighbor is likely to be in the same golden boat as you? If you are rich, is it better to live with your peers economically? Or should we try to befriend economically disadvantaged people who are more worried about their utility bills than CGT?

This has become increasingly problematic in recent years. Wealth is highly concentrated in certain cities. According to a 2023 study by Henley & Partners, New York has 775 centimillionaires (people worth more than $100 million), compared to 692 and 504 in the Bay Area and Los Angeles, respectively. There was. London came in fourth with 388 people.

It's not just cities. The Hamptons, parts of England's Cotswolds, and areas in the south of France have also become playgrounds for billionaires. City officials in Colorado's upscale ski town Steamboat Springs recently struggled to attract top talent after offering a $167,000 salary, which wasn't enough to buy real estate at the resort. It was reported that it was not possible. Even doctors who can afford to pay £1 million for a home say they are being outbid by cash buyers.

You don't have to be a socialist to wonder if something is wrong when neither well-paid professionals nor average-paid workers can afford to live near their place of work. Steamboat Springs may have inherited an image as a place for cowboys and ski enthusiasts, but that image is decades out of date.

Of course, even in the 21st century, there are not super rich people everywhere. In the UK, only one city is in the top 50 millionaires list, Henley. Germany, France and Italy each have only two. Completely desirable cities like Lyon, Manchester, and even Berlin don't make it onto the list. It is unusual that Warren Buffett still lives in Omaha, Nebraska. There are only three millionaires in the Midwestern state, compared to about 100 in New York state.

But should you live in a wealthy enclave, even if you're just a millionaire? What are the pros and cons? One problem is that you end up with a distorted idea of ​​what wealth is. about it. This can be seen in cities such as London and San Francisco, where the top 1 percent of income earners are routinely promoted as “middle class.” This can be a problem if the city's wealthy enter government. Because they were only surrounded by other wealthy people, they tended to assume everyone was just like them and generalize from their experiences and make policies geared towards people with normal incomes.

It can also lead to a lack of empathy, which is not the secret to social cohesion. Being surrounded by rich people can lead you not only to believe that six-figure incomes are the norm, but also to believe that wealth is natural, that poor people are lazy, and that taxes are theft. This echo chamber effect is most acute in Silicon Valley, where billionaire tech fraternity liberals blithely state that the world's problems can be solved simply by applying their own genius. There is.

When people consider their wealth relative to others, there is a stronger association between money and happiness.

That being said, there may be some benefits as well. Wealthy neighborhoods tend to have better schools, better restaurants, and less crime. Nor do residents have to worry about standing out as wealthy in town.

Therefore, it is tempting to believe that living in a wealthy neighborhood may be bad for society but good for residents personally. However, this is not necessarily true.

In fact, being perceived as having a lower status due to the wealth of those around you can reduce your happiness. A 2021 study by researchers at Singapore Management University and Yale University found that “there is a stronger association between money and happiness when people consider their wealth relative to others.” .

This explains why one observer, in Tom Bower's 2006 biography of disgraced former media mogul Conrad Black and his wife Barbara Amiel, explains why Conrad is America's poorest billionaire. “I don't understand why you want to be,” he quipped, clearly explaining the situation. Although Black was objectively incredibly wealthy, he was constantly playing catch-up because he surrounded himself with even wealthier people.

Perhaps living in Omaha (or Manchester, Newcastle, or Liverpool) is the key to wealth and happiness. Unless, of course, you have the strength of character not to compare yourself to your Notting Hill neighbors. Jacinth Tan, assistant professor of psychology at the Singapore Management University, cited a quote often attributed to Mark Twain about the research she led: “Comparison is the death of joy.”

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This article is part of FT Wealthphilanthropy, entrepreneurs, family offices, alternative and impact investing.