Big Property or Small Property: Which is a Better Investment Choice? Evidence from the Hong Kong Residential Property Market

Abstract

The relationship between property size and property investment yield is an interesting issue in the real estate market. Previous studies usually use the mean-variance criterion to compare the return-risk profiles of the yields of different property sizes in the US. However, this criterion has a few shortcomings. This paper provides the first attempt to use a stochastic dominance approach to analyze this issue. We adopt two powerful stochastic dominance tests (Davidson and Duclos, 2000; Linton et al., 2005) to compare the yields of five property size classes in the Hong Kong residential property market. In our study, we analyze two possible investment outcomes: 1) investors could not rent out their properties, and thus they would gain/lose from the appreciation/depreciation of residential property prices; 2) investors could also gain from rental incomes. Our empirical results provide strong evidence to show that the yields of smaller property classes stochastically dominate the yields of bigger property classes, suggesting that buying smaller properties is a better investment choice in the Hong Kong residential property market.

Keywords: Mean-Variance Criterion; Stochastic Dominance; Property Size; Hong Kong Residential Property Market

JEL Classification: C12; C14; G11