What counts more, the neighbors or the building?

Reports say the most influential factor in property prices is the neighbors.

The media were abuzz over a recent government report that disclosed, to general astonishment, that the most influential factor in property prices is the neighbors and not the physical state of the surroundings.
Ayal Yitzhaki, the Justice Department’s chief assessor, affirmed what has been the most well-known dictum of the real-estate profession since at least the 1920s: The three most important factors in real estate are location, location and location.
The report presented the results of a statistical analysis covering scores of variables reflecting the neighborhood of the apartment. It began with apartments of similar physical traits, so as to focus on the impact of the neighborhood.
It is no surprise that external measures such as accessibility significantly impacted prices.
But, as the report said: “The results of the analysis that Yitzhaki conducted pointed to two factors as the principal influences on the prices of dwellings: 1. The education level of the residents of the neighborhood; 2. The monthly income of the residents of the neighborhood.”
One of the variables measured was the residents’ background (Europe/America versus Africa/Asia, considered a proxy for Ashkenazi or Sephardi). The newspapers had a field day with this one. One newspaper’s headline said: “Ashkenazi, educated and well-to-do neighbors” will send your property values soaring.
However, this effect was actually quite minor, and the dominant effects were education and income.
The report points out that the findings display “a mechanism for homogenization of neighborhoods.” If not for the neighbor effect, we would expect some kind of arbitrage effect whereby underpriced apartments in bad neighborhoods would be snapped up by bargain hunters, and overpriced ones in good neighborhoods would be bid down. But since only well-off people can afford to live in the expensive neighborhoods where other well-off people live, neighborhoods tend to have a homogeneous character and keep their characteristics for extended periods of time.
The report was done in a professional manner, yet I have a few reservations about the way its conclusions were presented and even more about the way they were presented in the media. In both cases I feel there was an exaggerated emphasis on the idea of “status seeking.”
While the report shows a high correlation between neighbor “quality” and apartment prices, in my opinion a lot of the correlation is not due to the neighbors but due to other aspects of the neighborhood.
Suppose no one cares about neighbors, but they do care about schools. If there is an excellent school in the neighborhood, that will bid up prices and only wealthy people will be able to live there. The statistical analysis will show a correlation between prices and incomes, but the real driving force is schools. Schools are one example, but the same effect would follow from any variable that Yitzhaki did not consider.
The report goes further out on a limb and states: “Populations that are viewed as ‘high quality’ create a positive image and increase the demand for dwellings out of a desire on the part of the consumer to ‘brand’ or associate himself with a higher status group.”
It is reasonable to think that these “branding” effects exist. In fact, the phenomenon was recently researched by Israeli economist Avihai Snir. But the results of the analysis don’t demonstrate this. We would get the same results if people didn’t care about what the neighbors think of them but only about what they think of the neighbors; for example, they like neighbors with lots of income and education, perhaps thinking that these people (or their children) may be nicer, more interesting, or less likely to be criminals.
The news coverage was especially misleading.
This phenomenon is a universal feature of all real-estate markets in all places and all times, and drawing conclusions about the “status-seeking Israeli” is neither accurate nor newsworthy.
Conversely, there really is a unique Israeli phenomenon of a “mechanism for homogenization of neighborhoods”: It is a called an acceptance committee (vaad klita). Even as Israelis are made somewhat uncomfortable by natural processes of neighborhood selection and homogenization that are found everywhere, in Israel there is a special phenomenon whereby homogenization is encouraged and enforced by official policy.
In kibbutzim, in “community settlements” and in de facto cities defined legally as community settlements, there are official acceptance committees with formal authority to reject families that don’t fit the mold of homogeneous communities. While the exact legal status of these committees is not clear, challenges to their judgment are few and far between.
An additional phenomenon is official sanction given by planning bodies to erecting entire cities devoted to a single population group, such as the haredi city being contemplated in Harish or the Arab city that keeps being promised but never built.
I find evidence that Israel does indeed have an unusual, and excessive, degree of neighborhood homogenization. But if we are looking for the reasons, we shouldn’t look at the mundane, amorphous forces at work in neighborhoods around the world. We should look at the unique policy instruments Israel has implemented to intentionally cultivate and enforce segregation in its municipalities.


Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).