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Toronto Star - Markets sink 800 points as U.S. bailout fails

M

mattyg

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Obviously there are some real concerns about the state of the economy these days and it could produce some extremely interesting conversation in this thread.

Whether you are just trying to weather the storm, or make the best of this situation by buying stocks in companies that are COMPLETELY undervalued (eg. RIM) there is a lot up in the air at the moment.

Does anyone have any ideas as to how this might effect Toronto's currently planned development projects? I've read a couple of articles about how buildings are standing half built in Chicago and the development firms aren't answering their phones to field any questions.

What will happen to the likes of Aura, 1BloorE, Trump, Four Seasons etc. etc....I for one would hope that they still go through!

I think that me might be in for a tough time unless the U.S. government does something either tomorrow or the next day to quell this situation and add some buoyancy to the lending market. Of course, Canada is a different story than the U.S. (I definitely DON'T think that any Canadian banks are going to fall in lieu of this situation) but a hurting economy in the U.S. will inevitably hurt us up here one way or another.

But how? Will developers just walk away from projects that are already 20-30% sold?

Any thoughts?

MG
 

HDLtd

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MG,

It will have a significant impact on development projects in the city, even without considering if buyers believe real estate, and particularly condo's, are a better investment over the next couple of years than say stocks.

The main issue here is project financing. More than a year ago, before the credit crisis began, you could probably obtain financing for a development project from 1 bank, with 55%-65% of pre-construction sales and a small amount of equity. Today, its very different to obtain financing. First, banks are limiting their exposure to any one project to a certain cap. That means developers must go to 3, 4, or 5 different banks to obtain the amount they require. Second, they are requiring up to 75% of pre-construction sales, totalling 80% of revenue (you can't just sell all the one bedroom's). Three, you have to have a significant amount of equity involved. And finally, none of the above matters unless you can establish a proven track record.

I would predict that many of the new high rise developers who were trying to enter the market and have opened to the public will never build, because they can't obtain financing. Some of the better capitalized and well known developers may pounce and buy out some of the projects, or they may just use their cash to help develop their own. Either way, it equals not as much development.

But, I would think that the established builders - Tridel, Daniels, Menkes, Minto etc will go ahead, although much slower. Especially if they can build with their own money.
 

ducati0000

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The bailout wasnt rejected,its going back in with a revised placement on Thursday,the oversight for the money was HUGE concerned for the right wing voters,too many gray areas where the money is actually going to...why make things so hard?..help out the home owners thats going to lose their homes,provide emergency loans to those who qualify,help those who need revision of the renewed mortgage.Why does the money have to go to a mismanage company that cost tax payers billions of loses?
 

cabbagetowner

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MG,

It will have a significant impact on development projects in the city, even without considering if buyers believe real estate, and particularly condo's, are a better investment over the next couple of years than say stocks.

The main issue here is project financing. More than a year ago, before the credit crisis began, you could probably obtain financing for a development project from 1 bank, with 55%-65% of pre-construction sales and a small amount of equity. Today, its very different to obtain financing. First, banks are limiting their exposure to any one project to a certain cap. That means developers must go to 3, 4, or 5 different banks to obtain the amount they require. Second, they are requiring up to 75% of pre-construction sales, totalling 80% of revenue (you can't just sell all the one bedroom's). Three, you have to have a significant amount of equity involved. And finally, none of the above matters unless you can establish a proven track record.

I would predict that many of the new high rise developers who were trying to enter the market and have opened to the public will never build, because they can't obtain financing. Some of the better capitalized and well known developers may pounce and buy out some of the projects, or they may just use their cash to help develop their own. Either way, it equals not as much development.

But, I would think that the established builders - Tridel, Daniels, Menkes, Minto etc will go ahead, although much slower. Especially if they can build with their own money.
agreed. many of the weaker developments will never break ground. bad news for the people who'll have their money all tied up for years.

there's some good buying opportunities out there. value investors having a field day.
 

Chromeboy007

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agreed. many of the weaker developments will never break ground. bad news for the people who'll have their money all tied up for years.

there's some good buying opportunities out there. value investors having a field day.
Define 'weaker developments'? I have an unit at 101 Sherbourne, The Modern, that's scheduled to break ground some time soon after reading what HDltd said I don't know...
 

Observer Walt

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There is no indication that any development which has been approved and sold up to the 70% mark will be cancelled. Anything now under construction will be built. There are possibilities (and some unsubstantiated but reasonably credible rumours) that a development or two which have not met these benchmarks may be cancelled, or more likely delayed. I will not be surprised if we learn that a few more developments which are currently just in the initial planning stages will be put to the back burner until the market is more receptive.

-----

A prediction above that a Canadian bank will fail "within 300 days" is completely irresponsible. No one who is knowledgeable is saying any such thing. The Canadian banks have almost no direct exposure to the U.S. mortgage market. Their exposure is to the asset-backed commercial paper (ABCP), and the hits on those have pretty much been taken already.

My counter-prediction is that "within 300 days" at least one of the Canadian banks will take advantage of an attractive buying opportunity, and acquire a U.S. bank of significant size.
 

cabbagetowner

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there's more development than money to pay for them. their was an article (did a check can't find it now) a month back predicting that large number of the developments in the gta would not get financing.
 

lowesthangingfruit

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Yep, I already yanked all my cash out...sitting in gold and socks.:) I predict at least one Canadian bank will fail within the next 300 days.

Thankfully, I was away from my trading desk when the market tanked today. Good buying op's coming....:)

RIM, $60 support held today...if markets continue to tank, here comes $40.:D
UD, you been around I am sure so you must know when there is blood in the streets, that's the time to buy. Not bragging, but nibbled at some financials (not banks) and oil yesterday and got some healthy returns today. But that's just one day, I know.

To the original poster, as to correlation between stock and real estate market....it's kinda out of whack is my take. Usually equity markets and real estate markets are counter-cyclical.....except this time around it seems that that the melt down of one market (ie. real estate) is leading to the meltdown of the other vis-a-vi the freeze up in the debt market.

As stated previously, I will buy when there is blood in the streets. But as it stands now, there is no blood (yet) in the Toronto real estate markets so I ain't buying (yet). Someone please wake me up when there is hemorrhaging which will undoubtedly occur if UD's prediction of a Canadian Bank failing comes to fruition.
 

borisp

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$700 bil bailout passed

WASHINGTON–The U.S. Senate easily passed a revised $700 billion financial rescue plan last night, taking the first step toward easing a credit crisis in the United States two days after a House rejection of the package caused a global stock market sell-off.

The 74-25 bipartisan vote in favour of the bill came after it was sweetened with a number of measures aimed at getting Republicans in the House of Representatives onside so the bill can receive full congressional approval and head to the desk of U.S. President George W. Bush by tomorrow.

The Senate vote was expected to give a boost for the stock markets.

Thomas Caldwell, chair of Caldwell Financial Ltd., said stock markets would likely stage a "moderate rally" today in reaction to the vote. He noted that Tuesday's massive rebound suggests the deal's endorsement has already been priced in to stocks to some extent.

Markets were basically flat yesterday, awaiting the Senate action.

Some 133 Republicans in the 435-member House – where every seat is up for election in fewer than five weeks – refused to back the package Monday and it was defeated.

There were signs last night many of them were losing their populist fervour in the face of a 778-point Dow sell-off Monday and a change in the tone of calls flooding into their offices.

But the so-called sweeteners will come with a steep price tag because they include a number of tax breaks which will add to the U.S. deficit and inflate the $700 billion price tag on the package.

Passage in the House in a do-over is hardly guaranteed because some conservative Democrats might now flip their support because of the unrestrained spending in the Senate version of the bill.

The goal of the legislation remains the same as it was when the defiant House stunned observers – it would allow the government to spend billions of dollars to buy bad mortgage-related debt and other toxic assets held by teetering financial institutions.

It would free up $250 billion immediately to allow Treasury Secretary Henry Paulson to step in and take the bad assets off the books, allowing frozen credit to begin flowing again and keep the economy from a deep recession.

Already, difficulty in obtaining car loans has sent auto sales plummeting and some cities have begun deferring capital projects, which in turn are costing jobs.

Backers of the bill still maintain the program could ultimately cost much less than $700 billion and taxpayers would be protected, when the devalued assets are eventually sold at a better price.

Both presidential candidates, Democrat Barack Obama and Republican John McCain – one of whom will inherit this crisis – made rare returns to Washington to vote in favour of the package.

"There will be time to punish those who set this fire,'' Obama said on the Senate floor, where he had not cast a vote since July.

"But now is not the time to argue about how it got set ... right now we want to put out that fire, and now's the time for us to come together and do that.''

He said the cost of House inaction Monday was the single largest decline in the stock market in two decades and a loss of more than $1 trillion in wealth – not just the wealth of Wall Street executives.

He said hard-working Americans are losing their retirement and pension funds.

"From my perspective, this is what we need to do right now to prevent the possibility of a crisis turning into a catastrophe.''

McCain, recording his first Senate vote since April, did not speak to the bill on the floor.

But he struck a bipartisan tone during a campaign stop in Independence, Mo., and in television interviews.

"I hope (Americans) understand that we're in the worst financial crisis of our lives, and it is affecting Main Street, the ability for small businesses to obtain lines of credit for people who want to buy a car, to get a loan, and it's affecting them dramatically,'' McCain said.

The Senate version would give about 20 million middle-class Americans relief from a higher tax level known as the alternative minimum tax, and would extend about $8 billion in tax relief to states recently hit by hurricanes, tornadoes and flooding.

It would give businesses tax breaks for switching to the use of renewable fuels, force group health plans to cover mental illness and addiction as they do physical illness, and insure bank accounts up to $250,000 from the present $100,000.

Democratic House leader Steny Hoyerconceded some members of his caucus could be upset by some of the tax breaks and other goodies because there is not a commensurate spending cut and the measure would increase the deficit.

"But (they also) believe very strongly that passing this bill to stabilize the economy, reinstate confidence in the markets, is critically important for their constituents and their hometowns.''

John Boehner, the Republican leader in the House, said he expected the Senate package will be put to the House intact.

"I think the package they're putting together has a much better chance than what we had on Monday,'' he said.

"I do think that the big (market) drop on Monday really had a chilling effect on a lot of our members and a lot of their constituents.

-thestar
 

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