Big House or Small House, Which One Should We Buy? Evidence from Hong Kong

Abstract

Big house or small house, which one should we buy? To answer this question, we employed both mean-variance approach and stochastic dominance approach that utilizes the entire yield distribution to rank the performance of the Hong Kong housing market. While mean-variance rules cannot show a clear preference between different classes (sizes) of housing, we find, however, that smaller class housing has first-order stochastic dominance over larger class housing. That means not only risk-averse investors but also any investor with increasing utility function can maximize their expected utilities and expected wealth. We conclude that the smallest class housing provides a better return for both risk-averse and other types of investors and a non-satiation investor will increase his wealth as well as his utility if his investment is shifted to the smallest class housing. This suggests even though there may not be arbitrage opportunity, Hong Kong housing market is not efficient. The answer is simple, in Hong Kong, we should buy small house.