Does this logic add up?

1) Not unless you really believe that the only appreciation you're seeing is because of the intrest rates, which is definitly a minority viewpoint.

2) Depreciation - More house, more depreciation, less income tax. Or at least that's the theory. (How real estate appreciates and depreciates at the same time is one of those things I understand, but have a had time believing in)

3) What else are you going to do with the money. If you're gonna spend it on portable MP3 players and fast shiny cars, then spending it on bigger house will leave you much better off in the long run. However, you'd be even better off staying in the same house, and investing in rental property, gettng all the appreciation/depreciation benefits while having someone else pay most of the mortgage payment on it.

Matthew