LVRs from 1 October

August 21st, 2013 at 12:00 pm by David Farrar

The Herald reports:

Reserve Bank Governor Graeme Wheeler said banks will be subject to restrictions on high loan-to-value ratio (LVR) housing mortgage loans from October 1.

He said banks would be required to restrict new residential mortgage lending at of over 80 per cent to no more than 10 percent of the dollar value of their new housing lending flows.

He said the LVR restrictions were designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in that would damage the financial sector and the broader economy.

In a speech today at Otago University, Wheeler said housing played a critical role in the economy but was also a major source of “value and risk” to the household sector and the banking system.

“The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy,” he said.

“Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future,” he said.

So this move is not about lowering house prices, more about reducing the risk of a boom and bust cycle.

ASB’s chief economist Nick Tuffley said the Reserve Bank was continuing to highlight the need for fundamental issues such as the shortage of land and housing to be addressed in the long-term.

Freeing up land will do more for house prices than any other action. Almost every piece of independent research has confirmed the artificial scarcity of land for housing is the largest factor.

I’m not a huge fan of LVRs. They may be a necessary evil, but I think making it harder for people to get a mortgage is not the best way to take the heat out of the housing market.

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39 Responses to “LVRs from 1 October”

  1. martinh (1,241 comments) says:

    It just makes it easier for multiple property investors and overseas buyers to grab the properties and in growing number of cases take the rental money and capital gains (akin to ticket scalping profits) back overseas.
    Bad economics is going on here

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  2. Fentex (920 comments) says:

    It occurs to me that such a rule is an implicit statement that personal responsibility and financial liability cannot be trusted to restrict peoples, and banks, activities.

    Is it therefore an admission of fear that banks will over expose themselves while funding an unsustainable boom subsidising irrational pricing and in the inevitable collapse claim respite from government?

    Would it not be more rational, cheaper and market efficient to make it clear there will be no rescue, that money supply will not be allowed to expand so readily, that participants are on the hook for the quality of their decisions and size of commitments?

    Unless of course one doesn’t really believe in the free markets efficacy.

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  3. wikiriwhis business (3,883 comments) says:

    “Bad economics is going on here”

    Kiwibloggers want everyone spied on so they don’t care who goes homeless.

    I see NZ govts spying on a land on unemployed

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  4. labrator (1,897 comments) says:

    Won’t this just drive more people to seek the 10% deposit from less reputable sources?

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  5. Simon (728 comments) says:

    Some moron on the radio ZB whatever was crapping his pants about 1st home buyers going to second tier lenders for a deposit. How it wasnt going to make any difference. Retard.

    Not the point. The trading banks balance sheets are the point. The only point. All that sub prime lending. No bail out of the banks.

    “Freeing up land will do more for house prices than any other action”

    No it wont. If the RBNZ stops printing money then house prices will fall. (as I think they have started doing) For State policy reasons there has always a stop on building on land. Yet post GFC only since (Jan 2011) RBNZ start printing did house prices rise.

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  6. labrator (1,897 comments) says:

    Kiwibloggers want everyone spied on so they don’t care who goes homeless

    You’ve totally drunk the koolaid. (1,592) says you are a kiwiblogger.

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  7. Evadne (88 comments) says:

    So let me get this right: The same people who complained about the greedy banks causing the GFC by making too many bad loans (i.e. lending too much money to too many people against too little collateral) are now complaining that the banks have been told not to lend too much money to too many people against too little collateral?

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  8. Andrei (2,545 comments) says:

    When we bought our first house we could only borrow 75% of the value on first mortgage though we were able to borrow another 5% with a second and higher rate of interest mortgage.

    This doesn’t seem unreasonable to me, it was just prudent lending policy

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  9. Jack5 (5,007 comments) says:

    When Kiwis still financed their houses largely with mortgages directly from savings banks, building societies, and insurance companies, the norm was that borrowers needed to have 25 to 33 per cent of the value of the property they were buying.

    The banks have pushed lending out to as much as 105 per cent (this covers real estate and lawyers fees etc).

    When borrowers have failed and they need to evict them from the homes, they usually have hired private detectives or the like to enforce the eviction. They don’t have the balls to look the families in the eyes.

    With the moral hazard created by Governments bailing out banks (as too big to fail), and finance companies, too, a sense of social responsibilty has also gone.

    What the Reserve Bank is doing is overdue. The official cash rate, which chiefly affects short-term lending only (bills to five years etc) has proved inadequate, and has allowed a property bubble to emerge, and our currency to blow out as the banks pipeline in foreign savings. The kiwi dollar isn’t up for ever. Our chonic and continuing inability to achieve a positive balance of payments ensures that. Developing countries’ currencies are in a dive right now, and ours will follow some day.

    We don’t need such turbulence, so good on the Reserve Bank for at last introducing new economy-control tools. The only question is: what took it so long?

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  10. Viking2 (11,367 comments) says:

    Freeing up land won’t change house prices. It may have a slight effect on the package but to whose betterment? The pruchaser who will still sell the properrty later at the market price.

    Developers are not stupid, unlike Pavelitch.
    It costs what it costs to develop sections and in NZ that’s plenty. Unlike his utopia we have wind, rain, earthquakes, insulation, double glazing and so on and of course councils who are going to protect their arse and that of the ratepayers after the last debacle imposed upon people by the National Govt. I’m talking about untreated house timber that rots the moment it gets wet. (thankyou Mr Smith).
    All these elements contribute to the essential construction and therefore the cost of a house.

    Anyone who thinks house prices will go down can’t do the maths.

    NZ is a nice place to live. Many places in the world are not, so people want to come here. Apart from the last few years where people migrated because of the lack of jobs most of the time our population increases. More people, more demand. If developers can’t get the money they want they will sit there until the price increases. simple market economics.
    Net result house prices will continue to increase. Have done for over 2000 or more years.

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  11. Viking2 (11,367 comments) says:

    The kiwi dollar isn’t up for ever. Our chonic and continuing inability to achieve a positive balance of payments ensures that.

    And wait till it tanks and then see what it costs to build a house. 70% of a house these days is imported or is a product that is tied to NZ currency. Just like milk.

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  12. Jack5 (5,007 comments) says:

    An interesting aspect of pain from home mortgage borrowing, is that now that two-income families are the norm, the loss of either of the two earners’ jobs can make the couple unable to meet their mortgage commitments. Thus employment risk goes up.

    How a bank can lend 105 per cent to a two-income family is thus intriguing.

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  13. Jack5 (5,007 comments) says:

    Viking2 posted at 12:38:

    …developers can’t get the money they want they will sit there until the price increases. simple market economics.

    But they will either be paying interest or losing the opportunity of interest from other types of investment.

    AND

    Net result house prices will continue to increase. Have done for over 2000 or more years

    They don’t go up in a straight line. Property prices can fall sharply before rising again.

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  14. wf (416 comments) says:

    A long time ago we bought a house in Wellington ($13,600).
    The 1st mortgage was $8000 (6% from PSIS, $500/year over the max for 3%); 2nd mortgage $3000 (at 9%) from Lawyer trust; balance from Bank of Mum&Dad. Both working.
    We couldn’t get any money from BNZ.

    There might be a couple of extra 00’s on those figures today, but I expect people who really want to get into a house of their own will find similar solutions.

    I think that some state built housing would be useful in present circumstances with a limited tenancy based on income, with a commitment to buy, or leave. 25% 0f income was regarded as the maximum rental that should be paid and I think that was what state house tenants paid. Private rentals were relatively extortionate and many public servants refused promotions until they had secured a state rental.

    Just saying.

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  15. Jack5 (5,007 comments) says:

    If you don’t think the Reserve Bank needs such new tools, have a hard think about how wildly speculative the world is at present. For example, the latest in China is the rise of “virtual IPOs” issuing shares to invest in the virtual currency of BitCoins.

    http://www.bloomberg.com/news/2013-08-20/bitcoin-spawns-china-virtual-ipos-as-u-s-scrutiny-grows.html

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  16. Harriet (4,777 comments) says:

    The RB’s current move on LVR’s is also so that they can keep the interest rate down so that business does not suffer.

    In times past, the rate was increased when a housing bubble was taking place. Business suffered with an interest rate increase and deferred borrowing. For some businesses already in debt, sales were lower and staff were laid off or had their hours reduced. That would not be a good move in the current domestic or international enviroment.

    Along with the likes of poms and aussies running call centers in NZ, and the high speed broadband network being built, NZ businesses will have no excuse in the near future for having some of their work done in places like Southland. Those people who get future employment will invest in housing if they already haven’t. That in itself will help take the heat out of the housing market in cities.

    With the prices of houses in places like Southland being half that of Auckland ect, then the banks will not have as much of a problem with capital risk based upon the Auckland ect market inflating, or borrowers being out of work. All’s good.

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  17. mikemikemikemike (323 comments) says:

    Freeing up land will do nothing to the cost of buying or owning a home. I’ve said before – if you have a home 80km away from the city you have the associated costs of installing infratructure and services (which the developer will recoup) and then maintaining those services (via the council/rates) so unless those of us closer to the city are going to be further subsidising those who have to live further out to force prices down saying that building more houses in the sticks is completely wrong.

    The only sure fire way to lower house prices is to expand industry and oportunities away from the current ‘hot spots’ If I could earn my salary in Wanaka I would absolutley move away from the city.

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  18. peterwn (3,239 comments) says:

    A week ago, it seemed the Reserve Bank was indicating that it wanted to limit ‘top-up’ second mortgages. I had thought the aim was to minimise the risk of banks going fut if property values dipped below size of mortgages. The intended mechanism was that banks in their conditions had to specify that they had to give consent for second mortgages anyway. I thought banks already did this but could not unreasonably withhold consent. So it seems Reserve Bank wants to use LVR’s to try an dampen the housing market – which in Alckland would have as much success as King Canute trying to stop the tide coming in.

    It also seemed the RB cautioned banks from getting ingenious, then tried to define a line between acceptable practice.

    LVR’s almost by definition will hit first home buyers only. Those with a home with ‘spare’ equity can trade up to a larger home or purchase baches or investment properties without breaching LVR’s.

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  19. Jack5 (5,007 comments) says:

    Harriet posted at 1.10:

    NZ businesses will have no excuse in the near future for having some of their work done in places like Southland.

    The trouble with relying on low wages, Harriet, is that your business soon moves to where wages are even lower. NZ businesses have a lot more Philippines call centres than Southland ones. Clothing manufacturing is drawn to Bangladesh from China. NZ and Australian accounting work has begun to move to India, where much computer programming went earlier.

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  20. Paulus (2,597 comments) says:

    That the Banks have been heavily competing in cheap mortgages impinges upon their prime job – to lend money.

    This is indicative in probably saving KiwiBank who are approaching a solvency problem – hence the demise of its parent NZ Post, from who have been shovelling money into KiwiBank since it started.

    They have been probably the leading Bank to undercut mortgage rates, knowing the they are taxpayer guaranteed.
    Having now a restriction will allow them to decline mortgages to lower capitalised house buyers.
    Their other problem is that they have the segment of the market that the more established banks have declined.

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  21. s.russell (1,592 comments) says:

    peterwn,
    “LVR’s almost by definition will hit first home buyers only. ”
    Are you sure about this? I recall reading a few month ago when the ratio limit was first mooted that the opposite was true: most such mortgages were actually taken out by people buying up multiple houses for rentals.

    Fentex,
    The problem with your very rational plan is that other people are not. It is actually really hard to create an absolute expectation that there will never under any circumstances be a bail out. a) people will believe what they want to believe, b) there are too many unscrupulous politicians who will promise it (or who people will believe would do it), and c) if the worst happened anyway, even the wisest politicians may decide that the consequences of refusing a bailout are worse.

    Also agree with multiple comments above about borrowing 100% of the house value being silly anyway. I’d never do it.

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  22. Ian McK (237 comments) says:

    Sick of hearing about housing . . . live within your means, if it means buying in a lower grade suburb, so be it. We all had to work hard, save, and go without; not have the likes of red politicians use us as a pawn for their political gain. Until our young realise that you don’t get anything for nothing, and not everything at once, the better for NZ.

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  23. hj (6,827 comments) says:

    Demand is also important according to the Savings Working Group
    “Immigration and tax breaks for investment in residential property are being cited as the underlying causes of steep increases in the cost of housing over the past decade.
    New Zealand now boasts one of the highest rates of home unaffordability in the world as a result of prices rising far faster than incomes, and the government’s Savings Working Group blames that squarely on the policies of successive governments.
    Although “the favourable tax treatment of property investment” accounted for about 50% of house price increases between 2001 and 2007, the working group said, there was also strong evidence that rapid swings in immigration brought about price-rise “shocks”.
    There was a sharp spike in immigration in 2001, 2002 and 2003 and, said working group committee member Dr Andrew Coleman, it appeared that property prices did not fall anywhere near as greatly when immigration fell again.
    The report added that there was little evidence that immigration boosted local incomes. In fact, the need to build roads and schools meant that net migration contributed to the national deficit. ”
    http://www.stuff.co.nz/business/money/4622459/Government-policies-blamed-for-house-prices

    It’s the sort of story John Campbell is all not over.

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  24. leftyliberal (642 comments) says:

    @Paulus: “This is indicative in probably saving KiwiBank who are approaching a solvency problem – hence the demise of its parent NZ Post, from who have been shovelling money into KiwiBank since it started.”

    1. Has Kiwibank not been earning a profit the last few years? (on the order of 80m in 2012 IIRC)
    2. What evidence is there of a solvency problem?

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  25. hj (6,827 comments) says:

    Ian McK (19) Says:
    August 21st, 2013 at 3:40 pm
    Sick of hearing about housing . . . live within your means, if it means buying in a lower grade suburb,
    …..
    and you know asset inflation isn’t wealth creation it just transfers a charge to someone else (moaning first home buyer). Government policy is to bring in cashed up byers from elsewhere to keep the powerful Property Council, banks, infrastructure providers busy. Unfortunately when growth stops we have to rely on traditional industries plus new ones which are yet to materialise.

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  26. hj (6,827 comments) says:

    Freeing up land will do more for house prices than any other action. Almost every piece of independent research has confirmed the artificial scarcity of land for housing is the largest factor.
    ………………
    and we have had the second highest immigration in the OECD yet the Productivity Commission heeds a study which manages not to find any evidence of migrants affecting house prices despite anecdotal evidence:

    From The Landlord Says:
    “Meanwhile the National Party released its immigration policy. You may wonder what this means for the property market. It is clear from research that immigration is one of the key drivers of house price growth.
    The logic is simple. If you import more people into the country, then you need more houses. Supply and demand means that prices are then pushed up, this is particularly so in Auckland.
    While the latest immigration numbers show the number of people coming into New Zealand is starting to rise, the Nat’s policy looks like it wants to increase immigration levels even further. (Although it is unclear what sort of number they are targeting.)
    This policy is, arguably, a plus for people who want house prices to rise. (But may be not so good for first home owners wanting to buy.)
    My guess has always been that property investors lean heavily towards the right rather than the left. (This was made clear in an email newsletter I saw from one developer this week.)”

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  27. Viking2 (11,367 comments) says:

    There was a sharp spike in immigration in 2001, 2002 and 2003 and, said working group committee member Dr Andrew Coleman, it appeared that property prices did not fall anywhere near as greatly when immigration fell again
    ========================

    Except that even though immigration may have even turned megative there weere still more people in NZ.
    More people need more houses.

    and this fellow is a Dr of what. Can’t do simple maths.

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  28. Viking2 (11,367 comments) says:

    Jack5.
    all the deveopers of any size own land on the outskirts of towns and the farm the land. you sheep cows etc until they are ready to farm people.

    Gees man.

    Frankly I get sick of the belly aching about first home buyers. You do not need to own your first home. Go buy one in a town that you can afford in a small town and rent it until you can afford to use the increase in value to buy another. Stop buying new cars, oversea’s trips, countless new phones, flash furnitue. (sit on boxes like we did. Its not that hard and anyway plenty of really cheap furniture at the sallies and opp shops and Trade me).
    Work more than one job. Try working 70 hours a week. We did and we paid a shit load more tax than you whiners. So STFU and get your shit together.

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  29. Viking2 (11,367 comments) says:

    HJ wote.

    My guess has always been that property investors lean heavily towards the right rather than the left. (This was made clear in an email newsletter I saw from one developer this week.)

    Absolute fanatsy.

    so you are telling us that Helen Clark is fo the right. What fucking clown.

    Property Investors are people who have a need to look after themselves rather than lean on the socialist government. They are not necessarily left or right.

    If you are going to write a bunch of bollocks at least do your homework and add some thinking to it.

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  30. wreck1080 (3,865 comments) says:

    This may destroy house prices in the provinces. Lets see.

    This government has no idea- they seem blind to the fact that supply is the issue.

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  31. hj (6,827 comments) says:

    “and this fellow is a Dr of what. Can’t do simple maths.”
    …….
    Savings working group
    Posted on August 24, 2010 by Matt Nolan
    I am a bit tied down at present (which should be obvious by my lack of response to comments). However, I just had to pop around to say that I approve of the team for the savings working group – bunch of great thinkers that will look at the issue objectively, and come up with some genuinely useful solutions/analysis.
    http://www.tvhe.co.nz/2010/08/24/savings-working-group/

    http://www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup/members
    …………..
    Team Government represents vested interests … a great band of stinkers.

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  32. Viking2 (11,367 comments) says:

    Migrant flow continues
    21 Aug 13, 10:51am, David Hargreaves

    New Zealand had a net gain of 10,600 migrants in 12 months to July – highest since the November 2010 year

    The continued strengthening inflow of migrants is likely to add further pressure to the already heated housing market.

    http://www.interest.co.nz/news/65986/new-zealand-had-net-gain-10600-migrants-12-months-july-highest-november-2010-year

    oh dear not more house buyers.
    Key and the Reserve bank will have a massive melt down.

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  33. hj (6,827 comments) says:

    Viking2 (9,836) Says:

    so you are telling us that Helen Clark is fo the right. What fucking clown.

    Property Investors are people who have a need to look after themselves rather than lean on the socialist government. They are not necessarily left or right.
    ……………….
    I was just pointing out that The Landlord Says believes immigration affects house prices (in contrast to the government line). Government policy hinges on an assumption that immigration isn’t a driver of house prices*.
    In the NZ context both left and right support immigration (although any party attracting a xenophobia label may be seeing the light).

    *In a statement to the Sunday Star-Times, [Minister] Coleman said: “Department of Labour research shows there is no strong link between immigration and house prices and migrants provide a net gain to the New Zealand economy of around $1.9 billion a year. If migration stopped today, the economy would contract by 10% over 10 years.”
    http://www.stuff.co.nz/business/money/4622459/Government-policies-blamed-for-house-prices

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  34. burt (8,190 comments) says:

    We need a big fat bloated state lender to lend to high risk borrowers who think it is their god given right of living in a socialist society to own a house. Perhaps we could plan to have our own sub-prime mortgage crisis…

    For gods sake – if you can’t afford to save the deposit how the hell do you expect to manage maintenance costs ? Pretty simple if you ask me – a mortgage is not a god given right…

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  35. calendar girl (1,214 comments) says:

    leftyliberal@4:01 – “Has Kiwibank not been earning a profit the last few years? (on the order of 80m in 2012 IIRC)”

    Sorry to burst your balloon, lefty. The answer is “No, it hasn’t”. KB’s alleged profitability is reliant on hefty value transfers from NZ Post (premises to name one source) to conceal the fact that the great socialist creation of Jim Anderton & Co’s creation still doesn’t make the grade, despite the infusion of large doses of capital from the always-burdened taxpayer.

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  36. leftyliberal (642 comments) says:

    @calendar girl: I’d be most interested at seeing a good analysis of this – if they’re fudging the numbers then it would be a useful story to tell. Do you have suitable data sources, or perhaps some analysis you could point me to?

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  37. dime (9,805 comments) says:

    i just hope this makes it easier for 23 yr old graduates who want to buy their dream home in westmere.

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  38. Anthony (789 comments) says:

    The last Labour govt sat big for all those years of high house price inflation and did absolutely nothing. Jim Anderton pushed for a capital gains tax but Cullen and Clarke didn’t want to lose any votes or wanted to look after their nest eggs?

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  39. Evadne (88 comments) says:

    I see from the Herald (http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11112310) that banks will now “cherry pick loans”, favouring people with “high equity and secure incomes” over the “poor middle class”.

    Outrageous that banks should choose to loan to low risk individuals ahead of higher risk individuals! Discrimination! Outrage! How can someone loan money to people likely to pay it back when there’s so many other, poorer people who want houses?! That’s favouring the rich! Outrage!

    Don’t journalists understand anything about debt & financial risk? Don’t they understand that the “the poor middle classes deserve to own their own houses, so let them have easy-to-get low-deposit high-value loans”-attitude was one of the major contributors to the GFC?

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