Since you're now in the correct forum now
Go with the small house if you can fit into it and don't worry about appreciation. Sure, the larger house would NORMALLY appreciate more than a smaller house, but the days of 100% appreciation on houses is over for a while, if ever.
Advice from my dad and interpreted by me (since I just went through this debate): A house is a money pit, not an investment. You'll pay for maintenance, repairs, more utilities, taxes, etc... If you want to make money while owning a house, stick to the small house and put money into stocks.