Regardless of any competitive or status-based desires, income relative to your neighbours (everyone in your city) is a big part of actual purchasing power.
In most cities, housing prices are based on land value, not construction costs. And land value is entirely based on demand: what your neighbours are willing to pay for the same lot.
And most services are priced based on the salaries of your neighbours - the more you earn relative to them, the more of their time you can afford.
This does not necessarily conflict with the diminishing returns theory. If you are 4x as rich as your neighbours, you will probably want to move to a more affluent area. At which point you will have richer neighbours (i.e. stronger competition.) There's a good chance you will again be dissatisfied with your relative wealth and be motivated to increase it further.
In most cities, housing prices are based on land value, not construction costs. And land value is entirely based on demand: what your neighbours are willing to pay for the same lot.
And most services are priced based on the salaries of your neighbours - the more you earn relative to them, the more of their time you can afford.