This paper aims to investigate how a prospective buyer’s optimal home-size purchase can be determined by means of a stochastic-dominance (SD) analysis of the historical data of Hong Kong.
By means of SD analysis, the paper uses monthly property yields in Hong Kong over a 15-year period to illustrate how buyers of different risk preference may optimize their home-size purchase.
Regardless of whether the buyer eschews risk, embraces risk or is indifferent to it, in any adjacent pairing of five well-defined housing classes, the smaller class provides the optimal purchase. In addition, risk-averters focusing on total yield would prefer to invest in the smallest and second-smallest classes than in the largest class.
As the smaller class provides the optimal purchase, the smallest class affords the buyer the optimal purchase over all classes in this important housing market – at least where rental yields are of primary concern.
The findings suggest that in the Hong Kong housing market, long-term investors may be better off purchasing smaller homes. For other type of investors, it depends on their risk preference.
There is a very small body of empirical literature on housing investment, especially if the focus is on the optimal home-size purchase.
