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The Best and Only Way to Play Toronto’s Housing Shortage

Toronto condo developer Brad Lamb sent an email March 21 to unit owners of the 17 condo properties he’s developed in Toronto, warning that a foreign buyers’ tax in Ontario could trigger a recession.

Lamb is speaking about the controversial foreign buyers’ tax introduced by the B.C. government which has been successful in temporarily dampening the housing market in Vancouver. Ontario finance minister Charles D’Souza, originally against such a move, is now said to be reconsidering such a tax.

The Ontario Real Estate Association (OREA) argues the real culprit is a shortage of housing.

“Population growth is rapidly increasing in cities where we are also seeing some of the lowest levels of inventory in history,” said Tim Hudak, CEO of the OREA. “If first-time buyers, young families, newcomers to our province, are going to have any chance at home ownership, provincial and municipal governments must focus on increasing housing supply.”

While a new study from Simon Fraser University assistant professor Josh Gordon for the Ryerson City Building Institute in Toronto argues this is simply not the case, investors who agree with Hudak, the former leader of the Ontario Conservative Party, are wise to invest in some of the GTA’s largest homebuilders to benefit from any future increase in housing supply in the region.

Unfortunately, the only publicly traded homebuilder building homes in the GTA — Brookfield Residential Properties Inc. — was taken private in 2015, eliminating the one option available to do-it-yourself investors.

That’s the bad news.

The good news is that it was taken private by Brookfield Asset Management Inc (TSX:BAM.A)(NYSE:BAM) for $871 million and is now 100% owned by the globally recognized alternative asset manager, a company I’ve long admired. Fool.ca contributor Jacob Donnelly is right to call it a “core holding” for any investor.

In 2016, Brookfield Residential had pre-tax income of US$198 million, 29% higher than a year earlier and 5.4% of Brookfield Asset Management’s 2016 pre-tax income of US$3.7 billion. It’s now part of a rock-solid business that’s almost too big to fail.

Let’s go back to Brookfield’s residential business.

A quick look at its 2016 annual report shows that it owns more than 10,000 single-family lots in the GTA, one of its largest representations in North America; Calgary is its largest landholding with 25,486 single-family lots as of December 31, 2016 — 26% of its overall inventory.

So, if OREA is correct, Brookfield has a potentially large part to play in any increase in the housing supply in southern Ontario. That same opportunity applies to the other 11 cities and regions where it owns property for residential development.

“The Greater Toronto Area continues to see high demand for homes, driven by an overall lack of supply. In this market, we currently have all homes under contract necessary to achieve our projected 2017 closings,” Brookfield Residential CEO Alan Norris wrote in its 2016 report. “Going forward, collaborative work needs to be done to change the regulatory environment and pace of approvals so there is more product in the market to address the supply deficit and the resultant affordability challenges.”

If you read between the lines, he’s saying government bureaucracy and red tape is getting in the way of homebuilders bringing more homes to the marketplace. No one knows if that’s ever going to change.

Buy BAM stock and you get a bunch of businesses for the price of one. Equally important, you get the best and only play on Toronto’s housing shortage.

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Fool contributor Will Ashworth has no position in any stocks mentioned. The Motley Fool owns shares of BROOKFIELD ASSET MANAGEMENT INC. CL.A LV.

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