Tel Aviv Was Crowned the World's Most Expensive City. Can It Be Dethroned?

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Tel Aviv, 2021.
Tel Aviv, 2021.Credit: Eyal Toueg
Sami Peretz
Sami Peretz
Sami Peretz
Sami Peretz

Ten years ago, I met Alexander Mashkevich, a Jewish billionaire living in London, who made his fortune in the mining business. This was shortly after he had purchased what was at that time the most expensive apartment in Israel, a 1,000-square-meter penthouse at the Sea One Tower on Hayarkon Street in Tel Aviv. He paid 110 million shekels (currently $35.4 million) for the property.

I asked him why he was willing to pay such a sum for an apartment. He replied: “I spend more and more time here, which is why it pays to buy an apartment instead of paying for a hotel.” He also said that a similar apartment above his was now up for sale for 130 million shekels, suggesting that he’d made a good deal. I deduced from his answer that in addition to being amusing, he was also a thrifty person who found it hard to pay the exorbitant prices charged by the city’s hotels.

The more important and serious part of his answer is relevant to ordinary mortals looking for an affordable apartment in the city: “I’m not concerned about falling real estate prices in Israel, since there aren’t enough new projects on offer here,” he said. “Building here is complicated, and besides, I know a lot of overseas investors who would like to invest in Israel.” For Mashkevich it turned out to be a great bargain, since apartments similar to the one he bought are now being sold for double the price he paid.

Apparently, there is some logic to the madness. In December, the Economist determined that Tel Aviv is the most expensive city in the world.

Tel Aviv high-rises. Techies are accumulating savings from high salaries, bonuses and stock options, and are expected to buy apartments soon. Credit: Eyal Toueg

Mashkevich’s reply provided several of the underlying reasons for this. There is an insufficient supply of new housing projects and it takes a long time to build here. Foreign investors are indeed interested in investing in Israel, further driving up the demand. There is a paradox here: On one hand, his reply contained criticism of government bureaucracy and foot-dragging in selling land and approving construction plans. On the other hand, the question remains as to why foreign investors swarm to a country like this. But here, too, there is some logic to the madness. Investors see the government’s failure and realize that it means a low supply, making it very profitable to invest in apartments. They simply rely on the government continuing to maintain a low supply of apartments relative to demand, thereby increasing the value of their assets.

There are additional explanations for Tel Aviv’s new designation. First, Israel in general is 20 percent more expensive than the OECD average. Tel Aviv’s status derives first and foremost from state policies. The unique circumstances of the city are only a secondary factor. Among the latter are the newly rich people in high-tech who have hefty purchasing power when looking for apartments, restaurants and other services. There is also the impact of the government­­-sponsored Tama 38 urban renewal program, which increases the wealth of tenants and developers in Tel Aviv. Add to this the big money coming from Jews living overseas. Then there is the fact that Tel Aviv is a hub for business, culture and leisure, which brings demand for entertainment and shopping venues, as well as housing. This in turn drives up the cost of living. The high-tech world impacts the cost of living in Tel Aviv in another way too: The influx of billions of dollars into local investments weakens the dollar and strengthens the shekel, making Israel more expensive compared to other countries.

Tel Aviv's Hayarkon Park, in 2020.Credit: Tomer Appelbaum

All this raises two questions: Is it really a problem that Tel Aviv is the most expensive city in the world? Should anything be done to make the city lose this title?

There were days, not so long ago, when Israel was shunned and ostracized, with foreign investors keeping their distance. No one dreamed that Tel Aviv would become the most expensive city in the world. But it turns out that despite the security situation, which saw Scud missiles raining down on Tel Aviv during the first Gulf War and rockets striking there during Operation Guardian of the Walls this past May, the city remains attractive and desirable. That’s good, but it still leaves us with a very expensive city. Every trip there drains our wallets, and the young people who have not had a high-tech exit cannot afford an apartment there.

City Hall doesn’t like the town’s new title. Sure, they’re happy to have Tel Aviv included in the same list as cities like Zurich and Paris. But they realize that such a title exacerbates friction with residents and visitors, compelling the municipality to take their needs into account and collect less for the services it provides. But above all, it’s clear that Tel Aviv is becoming a city for the rich only. Service providers and consumers will visit from the satellite cities of Holon or Petah Tikva, but it will become a city where only those in the highest socioeconomic percentile can live. Good, successful cities need to be more diverse in terms of residents’ age, income and professions. Or, as noted recently by Tel Aviv Mayor Ron Huldai in an interview to TheMarker: “The middle class needs to have access to the heart of the metropolis. In other words, a teacher, nurse or policeman, people an orderly society cannot do without, must be able to live in the city. Some senior cabinet members think that a teacher in a Tel Aviv school should live in Holon.”

These words reflect the different approaches taken by the central government, which is comfortable with Tel Aviv being the most expensive city in the world, and the mayor, who prefers a city that is also accessible to people who don’t belong to the uppermost percentiles. Which of these branches of government has a greater impact on the cost of living? The central government, obviously. It has the power to determine housing policies, as well as transportation, employment and taxation polices, along with creating incentives.

Tel Aviv, 2020.Credit: Ofer Vaknin

A government failure

Tel Aviv’s meteoric rise to the top of the list of expensive cities, despite Israel’s security challenges and the fact that half the city is currently a mess due to work on the light rail system and the awful traffic jams, is not an achievement but a failure of recent governments. The lack of effective transportation and the red tape stymieing the approval of construction plans, at a time when a wealthy stratum of people with abundant purchasing power has arisen, explains the current situation in Tel Aviv.

It’s doubtful that the cabinet will convene in order to discuss how to take Tel Aviv off its perch as the world’s most expensive city. This is not perceived as a real problem. In fact, the municipality has also not held a serious discussion on whether it’s possible to make the city less expensive. Huldai is promoting plans for affordable housing, but these are a drop in the bucket.

Tel Aviv, 2021.Credit: Eyal Toueg

This returns the buck to the government. Regardless of whether Tel Aviv is ranked first or fifth (it doesn’t really matter), the government must take action to reduce the cost of living in Israel by dealing with its monopolies and cartels, including those that are under its ownership (such as land), as well as promoting competition. In tandem, it must accelerate the completion of the light rail and metro systems.

Effective mass transit is an essential precondition for augmenting productivity and lowering the cost of living, since this will enable people to buy fewer cars and spend less on gas, insurance, repairs and parking, and they will be able to get to work or leisure activities faster. This will help develop the labor market, with leisure and housing areas outside Tel Aviv curbing the demand for municipal services. This won’t make Tel Aviv a cheap city. It will still remain the most expensive one in the country, but it may lose its standing as the most expensive city in the world.

P.S. I have a good friend who lives near Rabin Square, 11 kilometers from where I live. When he suggests I join him for a drink at one of the bars near his home, I make the following calculation: Driving will take an hour (40 minutes there and 20 minutes back, since it will be late at night so there’s less traffic); parking will cost 70-80 shekels at a parking garage (assuming there’s room); and then there’s the toll on one’s nerves, which can’t even be calculated. In many instances, I forgo the pleasure and suggest we meet halfway. People living in Tel Aviv don’t forgo it. They go downstairs and grab a scooter. People living outside the city need to burn a lot of time and money in order to enjoy the city. In London, Paris or New York, the story would end with a cheap and short trip on the metro. Two or four stops and we’d be sitting inside a bar. Tel Aviv’s rise to the top of the list of expensive cities shows that the general demand for city services is stronger than my own personal demand. As long as this is the situation, it will remain the most expensive city.

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