The domino effect is a term coined in the 1950s by American Secretary of State John Foster Dulles, at the height of the cold war between the US and the Soviet Union. According to Dulles, no state whatsoever, however small or remote, was to be allowed to fall into the hands of the Soviets, otherwise it would be followed by a long series of other states who would embrace Communism, just as domino bricks fall one after the other.
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I was reminded of the domino effect when reading, like many others, the review by the prestigious Economist magazine, according to which Tel Aviv has become the most expensive city in the world, out of 173 cities surveyed. Beyond the fact that following the survey, an endless number of articles, opinion columns, and analyses have already been written, in my opinion, the most interesting angle is not the real estate prices in Tel Aviv and the fact that it has become a very expensive city – a fact that is by no means newsworthy – but rather the domino effect of Tel Aviv's prices on the housing market in Israel.
Just a taste of what is to come: according to my findings, it appears that housing prices in a relatively distant satellite city such as Netanya are currently identical, more or less, to housing prices in Tel Aviv in 2006, just prior to the quantum leap in prices.
In other words: over the past 15 years we have witnessed a domino effect in rising housing prices spreading outwards from Tel Aviv, first to neighboring cities such as Ramat Gan, Givatayim, and Ramat Hasharon, later to the more distant second circle – Herzliya, Ra'anana, Kfar Saba, and Hod Hasharon, and finally to the third circle, such as Netanya, and later, presumably, to the fourth circle, to cities such as Hadera and Or Akiva.
Why does it happen?
The domino effect has 3 main causes: the first is psychological. As soon as housing prices in Tel Aviv break another record, sellers in neighboring cities automatically raise the price of their apartments, too. This phenomenon spreads in circles outside Tel Aviv and Gush Dan.
Second is that apartment buyers unable to find the budget needed for an apartment in Tel Aviv compromise on an apartment in Ramat Gan or Givatayim. Later, when they can't find the budget for those cities either, they compromise on Petah Tikva or Herzliya, and so on.
Third, the phenomenon of a shortage in the housing market and the assumption that prices will continue to rise also causes many buyers to compromise on location. Paradoxically, they pay for that compromise, such as Yavne or Netanya, a price that only two or three years ago they would have paid for an apartment in Herzliya or Hod Hasharon.
So what's the solution?
What can we learn from the domino effect? Well, the fact that Tel Aviv's prices are pulling upwards prices throughout Israel is unfortunately a given that market forces have been determining for years, particularly since 2006. The fact that cities that up until a few years ago were considered peripheral, such as Hadera and Or Akiva in the north or Ashkelon and even Netivot in the south, are falling in line with Tel Aviv, will continue to set the tone in the years to come.
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This circumstance can only be changed through a smart combination of comprehensive urban renewal in all of Tel Aviv's satellite cities, including relatively remote ones, which are already seeing rising prices, and massive land marketing.
It is important to keep in mind that many of the third- and fourth-circle cities, such as Rehovot, Hadera, and Ashkelon, contain significant land reserves, so that in order to stop the domino effect, decision-makers will have to act accordingly.
Eyal Bahari is CEO of the Zim Bahari Real Estate Group
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