With China's real estate bubble showing signs of bursting, a growing number of wealthy Chinese are targeting California as a place to buy homes and businesses, according to a report released Thursday by the UCLA Anderson Forecast.
Last year, Chinese individuals and enterprises invested $12.5 billion in the United States, including $2.2 billion in real estate, with California being the "preferred investment location," wrote William Yu, a Taiwan-born economist at UCLA.
"We have seen many smart Chinese investors bring in cash to buy properties in Los Angeles over the past two years…," Yu said. "For Chinese investors, West Coast cities (including) Los Angeles, San Francisco and Seattle are ideal locations because of their geographic advantage, for example, direct flights, mild weather and large Asian communities."
Yu's charts also suggested that San Diego could be an attractive target because of its relatively low multifamily housing vacancy rates, which "might predict higher growth for rents in the future."
The reason for the recent influx of Chinese investments -- which totaled just $3.5 billion two years ago, including $900 million in real estate -- is that China currently has a real estate bubble that rivals Japan in 1990 and the U.S. in 2007.
Its ratio between home prices and income levels is three times wider than in the U.S., resulting in growing vacancy rates.
Because of Chinese prices are still at bubble levels, it's far cheaper to buy property in California than in a Chinese urban center such as Shanghai. And because California has a higher median income than Chinese cities, it's easier to charge high rents on the property.
As an example, Yu cited a 1,248-square-foot condominium that sold for $995,184 in Shanghai in March, or $797 per square foot. Yet a 2,116-square-foot condominium sold in Los Angeles for $800,000, or $392 per square foot. In other words, the L.A. flat was 41 percent bigger but 19 percent cheaper.
Because Los Angeles has a higher median income, it would be possible for the buyer of the condominium to rent it out at $3,000 per month, more than twice as high as the $1,400 monthly rent it would bring in China.
Despite the Chinese influx, residential sales and building permits remain relatively flat in California, even though home prices and employment have been on the rise, UCLA economist Jerry Nickelsburg wrote in a separate section of the report.
In contrast to San Diego, where residential permits grew by an annualized 29 percent in the first quarter, the statewide total for permits is "just now reaching the anemic levels of the mid-1990s," Nickelsburg wrote.
In addition, he wrote, home sales haven't kept track with the recently robust job growth in the state, which has outstripped the U.S. average in a number of regions, including San Diego.
A recent report by San Diego's National University System Institute for Policy Research suggests that one reason for the mismatch is that the jobs that have been created since the recession often aren't high enough to pay for a rent or mortgage, leading workers to live with relatives or roommates instead of seeking individual living spaces.
"Absent the income to rent or buy a home, it is difficult to set up a household," Nickelsburg wrote.
Nevertheless, he predicts that home construction will continue to grow statewide, rising from an estimated 95,100 this year to a projected 120,900 in 2015 and 136,400 in 2016.