# General Business Category > Business Finance Forum >  Property prices going down

## Dave A

I've been eyeing out all the upbeat talk about property price prospects for this year with a somewhat sceptical eye. Well, the hard evidence is starting to come in.



> House prices, excluding the effect of inflation, dropped by 2.5 percent year on year in March, the biggest decline since May 1997.
> 
> Absa's latest house price index, released yesterday, shows that the real price of a middle-segment house has dropped by 3 percent from an all-time high of about R651 500 in August last year to about R631 800 in March this year.
> 
> The middle segment of the market is defined by Absa as houses 80m2 to 400m2 in size and valued at R2.9 million or less, for which it had approved home loans.
> 
> Jacques du Toit, a senior property analyst at Absa, expects negative real growth in house prices of minus 4 percent to minus 4.5 percent for this year alone. This will be the first annual drop in real house prices since 1999, when it was minus 0.3 percent.
> 
> Standard Bank reported earlier this week that median house prices had dropped by 8.6 percent year on year last month to the lowest level since December 1996, when it was at minus 10.5 percent. The median is the point separating the top 50 percent of house prices from the lower 50 percent.
> ...

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## Graeme

Residential property valuations were made (guessed?) when property values were absurdly high.  Now that these values are all coming down are we to see our rateable values also reduced?  Don't hold your breath - the mayor's new BMW limo has to be paid for...........

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## Dave A

Here is a summary of pressures on house pricing just at the moment.



> With the hawkish statements by Reserve Bank governor Tito Mboweni, the market now expects a repo rate hike of 100 basis points this month, taking the prime interest rate to 16 percent, and a chance of another 50 basis points in August.
> 
> Based on the terms of First National Bank (FNB), this would increase monthly repayments on a R250 000 home loan over 20 years to R3 478 at 16 percent from R2 496 in June 2006, when prime was 10.5 percent.
> 
> John Loos, FNB's home loans property strategist, said times in the residential property were tough. The list of negative influences included: rising interest rates, rising inflation, a slowing economy, National Credit Act obligations, post-Polokwane jitters, Eskom shortages, the Zimbabwe crisis, xenophobic violence and low income yields.
> 
> He said: "The list has become significantly longer than previously anticipated, and especially interest rate hiking has gone further than we had forecast. As a result, a 21 percent decline in the value of new mortgage loans and re-advances is projected in 2008, and a period of national house price deflation is now forecast."
> 
> According to Lightstone Risk Management's national house price index, annual property inflation dropped to 7.8 percent in April, half a percentage point lower than in March and significantly lower than last April's rate of 14 percent.
> ...

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## Marq

There is an additional factor that I do not see being discussed out there on the subject of issues affecting or going to affect the property market. That factor is the effect of the new rates bill handed down by our socialist government, on the property market.

I do not know how the rest of the country will be affected, but with the suggested exorbitant rates rip off in Durban, there is a potential of a further probable 2-5% drop in property prices to accommodate the proposed increase in rates. If you are stuck with a commercial property label (this is different to actually being commercially zoned) then the decrease will be double. You could view the commercial increase as a business licence type fee and suck this up or pass it onto your customers and fuel inflation further, but I feel buyers will discount the rates into the purchase price - or do both.

From what I can gather an average R1mil type property is currently paying about R6,000 per annum on rates. On the new suggested rate from the eThekwini municipal anarchists, this price would be R9,000 per annum. So a simple view is that a R3,000 pa increase represents a capital amount of about R20k (depending who and where you are financed).  Taking into account a normal increase in the current rates value Vs the suggested rates - I would discount the purchase price by approx R20k = 2% - If you would like to run a bed and breakfast or your practise or a consultancy - double that to 4%. What I am saying is that I would have to substitute a payment that would have gone on a mortgage (or alternative value) with a monthly rates bill instead. 

On a R5mil property, the percentage numbers are the same but we are talking 100k out of a 5 mil property purchase - no big deal in negotiation, one might argue. But consider - would you buy a property that has a fixed monthly indefinite period fee of R3,750 or if you are a business R7,500? Could one ever consider that you actually own your property? These numbers are in addition to your current expenses. 

So the basic numbers of the rates transaction could drive the property prices down by 2% but what value will be placed on that huge monthly overhead once the euphoria of the new house feeling has gone away and the monthly bills resettle themselves against your monthly income?

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## Karenwhe

Property prices go down from now on.

But this is interesting.

The article is called 

*Internal property company memo shocker*

http://www.realestateweb.co.za/reale...1128&sn=Detail

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## Marq

This is why I have fired Sotheby's in the past.

They did not seem to have a handle on the market then so would not expect them to be any different now. Their valuations were always much lower than the opposition companies so that they could get rid of the stock and show turnover - why should they worry if they know most sellers negotiate their commission anyway. 

Their general approach in adverts if I recall says - asking price 2million - offers accepted from 1,5mil. So what is the asking price? Why even bother to put this story in the ad if offers at a huge percentage lower are acceptable?

They will also not bother if they do not have a sole mandate. Strange crowd always doing you a favour by selling your place. 

If I was the president of the estate agents in the country - they would have been taken off the roll a long time ago.

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## Dave A

I can't help thinking of what happened in '97. Then, external pressure on interest rates put the squeeze on affordability and resulted in a 30% drop on fairly low volumes. This time we've got the interest rate squeeze again and more besides.

I'm pretty sure of the direction of the market, but how big is the drop is going to be?

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## Karenwhe

The thing that some people do not know (some do, but by far not majority) is that the ad does not matter all that much.

If an estate agents get a written offer, or someone wants to sign a written offer at any price, the estate agent is obligated by law to present such offer (without any fail) to the seller chronologically.

In simple words, if you see an ad for 2.2 and you do your own CMA and you put your OWN offer (not even the estate agency one) they have to present it no matter what the price is, even if it is 1.1 or 900K.

And tomorrow if the get another one, they have to do the same.

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## wynn

I see this differently, maybe it's EL
The buyer can only afford a 40% cheaper house, so the guy that used to get a 1mil ront bond can now only afford 600,000.

But the guy that was buying in the 1.6mil ront bracket is now the buyer of your 1mil property. 

the problem comes if you overpaid during the good times and you have to sell (I mean really have to) you may have to price 25% less.

If you can wait for the 1.6 guy to realise he can't buy that high anymore you will realise your 1mil price, but you will have to wait! the good news is that when you go out to buy again prices will be in the same range.

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## AnakinSkywalker

Hi.  I am new to this forum but I have a burning question that I have been needing to ask.  

If you are willing to hold out for at least 5 years, would it be a wise investment to buy property now?  Is it too risky to buy property now?

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## Dave A

Over the long term, property has always performed - and property in SA is still relatively cheap compared to large chunks of Africa, so I don't think prospects of us "following in the footsteps of the rest of Africa" is grave cause for concern, either.

I suspect the key at the moment is whether it is wiser to hold off a few months longer for better deals. But I'm sure there are a few bargains out there already.

Karen is probably the best voice to listen to on this, though.

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## Karenwhe

Right now the market is very much a buyers market.

That said it is always risky - no matter what market and what product - to buy something if you do not understand the market or products.

Therefore, there are plenty of bargains right now in property, but if one does not do the homework about the area and have a clear purpose for the reason one buys, one can buy the wrong deal even though right now we are flooded with good deals and not enough buyers.

A good friend of mine just bought a property with 1.2 million equity in it. In other words, he did not buy for 1.2 million, he bought for a *saving of 1.2 million in the price*. In other words he can sell for 1,2 million more and make a huge profit when the market turns around or just keep it, refinance it and buy more cash+ property - LOTS of it.

Even I was impressed, and believe me I do see some good deals around that one can't believe they even exist.

I guess that is it in a nutshell. 

Now it is the time to buy property. 

It is never the time to buy property without a strategy for the purchase and without understanding the local microeconomics.

Hope this helps.

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Dave A (12-Jun-08), duncan drennan (12-Jun-08)

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## duncan drennan

> It is never the time to buy property without a strategy for the purchase and without understanding the local microeconomics.


This is a complicated question, but how do you suggest one goes about developing that strategy?

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## Karenwhe

Duncan,

Ouch that is too much to write, I think you should rather go to www.PropertyInvestorNetwork.co.za you will probably find at least a few hundred posts on strategy alone out of some 10,000 posts on everything from affordability to what to buy and where. 

I really don't think I can replicate that in one post.

There is just too much to know. Not rocket science, but a mass of data and information.

Once you know that, you start building your own strategy.

But in short you would need:

1. To know the purpose of the purchase (hence exit plan).
2. What entities you use (has to match with the above to max profit)
3. Financials of your own and then of the property with forecasts.

Now that said, there are many, many types of strategies, from investing, to trading, to living in a property and speculating.

Generalizing here but to give am example, you would not speculate in down market that would constitute a bad move (to say in the most mild way). But what I said could be totally wrong if you look at microeconomics of an area.

If you buy the wrong property for the wrong reasons - you bought wrong. And it does not matter in what market or at what price because your exist plan may not be achieved to what you wanted or end up paying taxes that are not necessary (e.g. income tax instead of CGT).

Therefore even the price, no matter how low or high would have match the end purpose of the property and exit plan.

Hope this helps.

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Dave A (12-Jun-08), duncan drennan (12-Jun-08), Graeme (15-Jun-08)

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## meakin

Dear Marq, on the third of June you asked  "Could one ever consider that you actually own your property? These numbers are in addition to your current expenses." I reply that  
you own your property until you surrender the title deeds through a sale or because of a default  iro of secured creditors.
It is also a fact though that, ignoring inflation, land prices go up (in a boom) and down (in a slump) whilst building values only go down because of depreciation. What ever happens your building is heading for the scrap heap over a generation or so.  The trick is therefore to own land with limited improvements and to otherwise lease properties.  But don't tell too many about this until you have bought because they are in short supply.  Silly damn thing that it does not pay to make improvements!  
But did ratepayers in Durban object to the City valuation?  I did a sample audit there and 50% of values were below the selling price at the valuation date.  That means, prima facie, that the valuation roll would be set aside. Peter Meakin

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## Marq

If I have to pay a monthly amount to the municipality, that is greater than my bond, just to retain title, then I submit that while you may have a title deed in hand, it is a huge liability and certainly not an asset. As such - you do not own your property - the council does. :Rant1: 

The Durban rates scenario is slowly gathering momentum with rate payers association and opposition parties giving it stick. The municipality received over 50 thousand objections and the valuations continue to be challenged. Dictator Sutcliff carries on denying and remains arrogant and petulant as ever, according to the latest news from the Mercury.  :Boxing:

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## meakin

> If I have to pay a monthly amount to the municipality, that is greater than my bond, just to retain title, then I submit that while you may have a title deed in hand, it is a huge liability and certainly not an asset. As such - you do not own your property - the council does.
> 
> The Durban rates scenario is slowly gathering momentum with rate payers association and opposition parties giving it stick. The municipality received over 50 thousand objections and the valuations continue to be challenged. Dictator Sutcliff carries on denying and remains arrogant and petulant as ever, according to the latest news from the Mercury.


Marq, true.  But say all your taxes and rates too are confined to a single land tax based on the benefits which your land(s) enjoy and not your work, profits, interest and VAT.  If I may make a plug have a glance at my booklet "A Creative Solution to Poverty and Unemployment" and perhaps you will want to join us. Peter

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## Marq

> a single land tax based on the benefits which your land(s) enjoy and not your work, profits, interest and VAT.


Got me here Peter - I have no idea what this means.

My land does not enjoy anything - it just is. The utilisation of the land is another thing. How I work and what I generate is another. 

Perhaps you would like to expand your theory a bit?

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## meakin

Marq, I will try to answer your question.  You say "My land does not enjoy anything - it just is". 
PIM: 1) If it does not enjoy anything then, excuse me, why does it have a price?  Why is the average vacant plot price in the upper R3Ks and small-holdings double this?  Land prices are a multiple of land rents: PRICE= LAND RENT times its P/E RATIO, like share prices.
PIM : 2) Does your land not enjoy any natural endowments; no fertility, no rain, no sun, no view? 

PIM : 3) Does your land not enjoy any infrastructure such as roads, pipes, telekoms, electricity. 

PIM : 4) Does your land not enjoy any access to jobs, hospitals, schools, shops and other ammenities?

PIM: 5) If it lacks all of these then it has no benefits and is worthless.

PIM: 6) But note here that all of these benefits come from nature or society not from you personally.  

PIM: 7) So these benefits are entirely at taxpayer's (community) expense which become crystallised into private land prices.  The big one is the Gautrain which you and I pay for in Cape Town and Durban but which those who own properties near the new stations will benefit from to the tune of R22Bn in improved land prices. 

PIM: 8) My case is closed but the solution is to tax land fully and to replace taxes on  efforts which you personally make to earn a salary, profits, interest and to trade (VAT).

I must now go and mow the lawn so as to keep my house saleable" You will find more about this at www.sacprif.org in out booklet.

Peter

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## Marq

I have always battled to understand economics theory because it just does not appear to be logical.

Here is an economic theory that has been around since 1879 and Peter you are correct - years of research lie behind your proposal - not a new one  - but why has it not been implemented anywhere as a total system? 

The formula put forward that "When the tax rate equals 100% of the rent then the land price becomes zero", adds to what I said that we never own the land we live on or use. It is just set up as a liability in our system. The price of land is derived from my expectation of how I can use it, so excuse me  if I differ from your opinion that land has this ability to enjoy itself.

I also do not agree with the Physiocracy theory that there is no personal accrual of lands benefits. If it was not for personal effort nothing would ever  happen in the first place. So I still think land does not enjoy anything; we do, after we as individuals work it as such. The roads, hospitals etc. are for our benefits not the lands. This system proposed still penalises the user. Either for not using it or for adding value and thereby creating a basis for the tax.

Neither can I agree with your use of the example of the Gautrain. Those whose land was expropriated to make way would not agree with your benefits assumption and I cannot say that living next to a train station or rail tracks has ever increased any property value. The probability is that there will be a large reduction in values. Your billions in increased values, is from what I can determine, based on a model of the Jubilee railway in London - an entirely different world with hundreds of thousands of commuters likely to use it over a much shorter distance. The Gautrain it appears will cost more than the average person can afford and only services a few specific areas of the community who are unlikely to use it anyway. It is not a good example of 'community' structures to benefit all but more likely a good example of how the Government is keen to waste taxpayers money and fund their gravy train.

You also do not mention where the land is coming from or put forward any financial numbers to prove the point. I looked at the numbers briefly and they went like this - The current income required is about 400billion. Halve this as we will not need all the grants and social stuff and we do not need so much admin, tax offices etc. So we need to now raise 200billion There are 30million in the potential work force, all of who are given this 12 hectares that you mention. No other taxes are involved. The answer therefore is that each land owner (everybody) must contribute 6,7million each a year from their small piece of land....mmmm - I wonder.

Good luck with your legal action though. On this point I agree fully even though I think you are arguing against yourselves.

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## murdock

over the top for me...back down to earth... simple things...
if i purchased a house just to live in...so that i dont have to pay off someone elses bond as i have in the past 8 years...the most recent 4,5 years i paid off just over 300 000 of the landlords bond...kept the property in good order and did all repairs at my cost...then still got scr*wed for my deposit again...had to write off another R4500...there is always an excuse why they cant pay.

so now a simple question for a simple person...do i have to pay rates at the value  the council valued it at... or do i pay rates on the amount i have just paid for it?

i paid 60% of the value because the property needs some serious attention.

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## meakin

Marq says 1. "I said that we never own the land we live on or use. It is just set up as a liability in our system." 
PIM says "Marq, believe me you own the land described on your title deed. You can sell it or destroy it or build on it which you cannot do with other's land.  Currently you also own the Physiocrat or Ricardian rents.  That is you can lease the land to others who will pay you a rent depending on what you both agree are the monetary benefits to be enjoyed there, if you prefer."
Marq says "I also do not agree with the Physiocracy theory that there is no personal accrual of lands benefits."
PIM says I do not understand this but I do know that if you have two identical farms owned by identical twins except that one has no ground water [geologically] and the other has then the extra rent which someone will pay for the watered farm, when capitalised, will show a higher capital value. This is a personal acrual.
Marq says "This system proposed still penalises the user. Either for not using it or for adding value and thereby creating a basis for the tax."  
PIM says "If this means that two adjoining identical plots pay the same tax whether or not a house, barn, shop or factory are built on them then sure. If I own a mansion and my neighbour has not made any improvements then that is right to me because in contributing to the City costs (call them a levy if you prefer) I am not paying more then he or she even though I have invested in a house and pay wages, maintenance, depreciation etc."
Marq, on the Gautrain and the leakage of value to those around the new stations you will have to give me the benefit of the doubt.  Firstly huge developments are under construction which would not have happened before and secondly if even a gravel road is tarred it will raise the cost of raw land in that road.  A bridge saves petrol. All public infrastructure will raise land values unless it is completely inappropriate.  But why not let those who benefit from a road or hospital or rail link pay for it.  That saves you some anyway.
Marq, I can also send you the calcs about what what land taxes we will all pay but it is not necessary.  What happens is that the 2008/2009 R620Bn in domestic taxes is divided up between resource owners in accordance with the value of the land or mineral or whatever values. The new taxes from vacant lands are used to reduce the overall tax take or to improve services. 
Marq, do I hear you say that you are content to give up some of the rewards which your work, savings and trade bring in.   If so you are the first I have ever met.
Regards, and PS Governor Craddock of the Cape installed a land tax in the early 19th century to encourage indigent people from England [who had lost their land to the Norman Baron descendents] to immigrate to the Cape to escape their landlessness due to the Enclosures Act. It was called perpetual quitrent tenures.
PPS You can always change your mind and help with SACPRIF.  I am told nothing so bold has ever been tried as this!

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## meakin

You pay on the value at the date of valuation which is not necessarily what you paid for it. Peter Meakin.  In Durban the date of valuation was July 2007, I believe.

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## Dave A

I remember talking to a bank property valuer years ago and he mentioned that bank data tends to lag behind what is actually going on in the market. 



> An index tracking median house prices in South Africa fell 1,8% in August from a year earlier as tough financial conditions continued to weigh on the sector, a survey showed on Monday. 
> 
> Standard Bank's monthly residential property gauge has been in negative territory since March because higher interest rates and stricter credit laws introduced on June 1 2007, have weighed on the sector.
> 
> Property affordability has fallen since the central bank has raised rates by five percentage points in the past two years, stretching consumers to the limit at a time when they already face high inflation.
> 
> The median house price was R550 000 while the five-month moving average growth was recorded at 7,7% year-on-year.
> 
> Standard Bank said the August data might be a signal that the sector was stabilising, although it would remain under pressure.
> ...


Well, it's the mean average, I guess. But still not pretty.

I expect the fact that investing in property overseas is pretty attractive right now isn't going to help local markets much either.




> A change in thinking among the investor community towards offshore diversification is becoming increasingly evident, driven in part by attractive yield value in several overseas property sectors. 
> 
> Historically, South African property companies have been precluded from investing offshore.
> 
> Exchange-control issues aside, forward yields on foreign property investments in highly developed countries such as the United States, the United Kingdom and other European centres have been far too low to be attractive to South African listed companies. This was because the acquisition of such foreign assets would be income dilutionary to local funds, which in turn would have had a negative effect on the acquirers' share price.
> 
> But according to Brian Azizollahoff, chief executive of Redefine Income Fund, the advantages of limited offshore diversification have made even dilutionary acquisitions somewhat palatable as there is a mitigation of risk from the perspective of geographic concentration, as well as a natural rand hedge when the local currency weakens. "What is very attractive in the current world economic climate is that there is value in the property sectors in the US, Europe and Australia never before offered. Yields on both direct property as well as listed property companies are at highs even above yields in South Africa."
> 
> So what is the significance of all this for South African offshore investors? It is, Azizollahoff says, that the significant drop in property value is by no means confined to the listed property sector. Anecdotal evidence is of prime real estate in the UK trading at yields of 8% and 9% and in the rest of Europe (for example Germany) between 10% and 12%.
> full story from M&G here

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## Karenwhe

"I expect the fact that investing in property overseas is pretty attractive right now isn't going to help local markets much either."

That is not exactly true, unless you speak about speculating = that is not investing.

I see what is advertised in other countries that SA investors are looking most places they are buying into another boom market. Which can land them in the same place the boom in SA did.

Professional speculators can make a fortune right now overseas in certain places. But that is really not investing as they are looking at capital growth and then sell in 1 to 3 years.

Capital growth in "ghost money", until the time and moment that is realized. But it has to be realized.

In what country do you see prices so low (as in some areas right now in SA) that you can make money when you buy and reduce the risk of the purchase to minimum?

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## Dave A

> I see what is advertised in other countries that SA investors are looking most places they are buying into another boom market.


That would be putting the "opportunity" too strongly, surely. 

I'd say it is a good buying moment in a depressed market just like here - with the bonus of being a Rand hedge, relatively low interest finance and good long term prospects of being able to collect the rent.

I agree you still got to pick them and not get swept off your feet with agent sweet talk overamping the pitch  :Wink:

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## Karenwhe

The overseas market that are sold are in boom markets. In other words you rentals will NOT cover the bond.

This also means that you are exposing yourself to stronger currency shortfalls. In simple words you pay MORE for the pleasure of risking your money, when you could do it just as well at home with less risk if you are into taking risk in the first place.

I really don't understand why people are so blind to shortfalls.

Yes, of course if you are a multi-millionaire and you can buy outright and keep until "the cows come home" or with some bonds and you don't really care if you lose it because these buys are speculations (in case the markets will not go further up in some boom areas) - then it is not a problem.

But I see these places are sold to hard working people with high salaries. A salary is a salary and a shortfall is a shortfall and it HAS to be sustained not to lose the property.

Most people still don't get the difference between speculation and investing and will pay a high price for it. Most are already paying a high price for it in SA for buying high and wanting to sell to the "last fool in line" (as they say on the stock market). All you have to do is check the repo lists and auctions in execution to see the state of the affairs.

Now the market is depressed here so we are looking to make the same mistakes overseas. How does that make sense?

Really, there is no rocket science here, it is simple maths.

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Dave A (04-Sep-08)

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