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This question is prompted by a comment on the radio today, in which it was stated that house prices in the UK are about 10x average earnings (compared to the historically safe ratio for a mortage of about 4x), and that this is why there is a problem with affordable housing. One solution proposed by politicians and commentators is to coerce housebuilding companies and developers to build new houses rather than "sit" on land whose value might rise.

My question is this: as far as I am aware, house building businesses do not make "super profits", and are often heavily geared (heavy borrowings). The heavy gearing is because housing development is "up front" in terms of costs - you pay huge outlays, and only get them back if the project completes on time - hence excessive interest on those borrowings - and the dwellings are then sold. Importantly, borrowings are often secured not just on land, but also by covenants based on share price (in turn usually based on profits + dividends, in other words, the company must broadly maintain its expected profit levels).

So the political and social issue is not about housing stock. It's about housing price (10x earnings). Short of market controls over house sales prices, any remedy of the affordable housing situation would require that substantial new housing is developed and sold for about 40% of its current price, to solve the problem. It's clear that this could be done by local authorities, who can build at a loss if subsidised or if agreed by central government, but less clear whether it is remotely feasible to achieve it any other way.

(House rental pricing and part-ownership rates are largely fixed by house values, so we can discount that solution - if house prices remain too high, it's likely that rental prices will also be too high, to impact the problem, and if prices fall enough to solve it, then we will not need rental market changes to be imposed - they will fall as well.) Market controls on non-new housing sales would be politically unacceptable as well as impractical - house owners could not realistically be compelled to lower asking prices to about 40% of current prices at any realistic future time.

How can governments politically approach this issue? What possible structural solutions could a government deploy?

It seems, in simple terms, that the essential problem is that as wages won't rise by 2.5x any time soon, a substantial stock of housing at 40% of current prices must be made available, otherwise whatever else is done, it won't actually be affordable. But equally, if a housebuilder was directed to make a large part of their housebuilding available at 40% of current prices, that goes far, far beyond any kind of gain from land hoarding or profits they make. As a sector, they simply couldn't afford anything like that and still remain in business. Land prices don't have that level of flexibility either, no matter if brown or green locations. Interest on borrowings is at a historic low-ish point, so that can't be cut much either, and actions that significantly affect profits and dividends going forward, will impact borrowing covenants of heavily geared companies. Forced to cut the price that a large part of new housing is sold at - which is what has to happen one way or another - their business would go insolvent and if by some chance it didn't, the only other way would be that the direct costs of building a house would have to fall hugely - in other words every employee and contractor in the construction sector suffering a massive pay cut (order of magnitude 50%??) - which isn't going to be feasible either.

In short, politically it's essential that the "affordable housing" situation is addressed. But how on earth can it politically be achieved without gutting a major sector of the economy and its employees?

11 Answers 11

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Another reason you cannot have a significant drop in house prices is that it would push millions of people into negative equity, which in itself would cause massive damage to the economy (not to mention ruining people's lives!).

One particular thing to note is that we don't really have a housing shortage - what we have is a shortage of housing in the areas where there is a large demand - some northern towns have huge amounts of empty housing. One solution, therefore, is to spread the demand so that you don't have everyone needing to live in/near London (many people, after all, would rather live where they grew up, but can't if there aren't any jobs there...)

So some things that could be done:

  • Encourage companies to create jobs in areas with significant amounts of empty housing.
  • Encourage companies to allow more remote working/flexible working etc which allows people to live further away.
  • Discourage investors from sitting on empty housing (see the arguments post-Grenfell regarding luxury apartment blocks in central London that have never been lived in)
  • Improve transport & communication links around the country (again, reducing the need for companies to be near to London)
  • Comments are not for extended discussion; this conversation has been moved to chat. – Philipp Mar 7 '18 at 22:23
  • Fails to address anything that actually should be done... But, I guess this is politics.stackexchange, not economics... – Grimm The Opiner Mar 8 '18 at 7:54
  • Things that could be done (rather than "should") and generalities rather than exact details, are quite appropriate, given the Q asks what the government could do - what feasible options it might have. – Stilez Mar 8 '18 at 19:27
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TL;DR - the government should print more, take less, and stop interfering

Houses aren't that expensive. Land isn't that expensive. Land with planning permission is incredibly expensive.

A hectare of brown field land without planning permission might sell for £16,000, and you'll get 12-14 reasonable houses on that. The cost of land for each house is virtually insignificant. Land with planning permission is up to 1 million pounds per acre (acres are 2.5 times smaller than hectares), so we're adding up to £170,000 odd to a house price just for the bit of paper. Planning permission is expensive for the most obvious of reasons. There's not enough of it.

We also need to be able to expand up as well as out; cities with rules forbidding or curtailing development above a certain height force us to expand out rather than up, requiring more land (with planning permission, of which there is not enough).

Stamp duty also discourages people from moving, and seizes the whole market up. Especially relevant is that pensioners think twice about downsizing/moving away from the city because the government charges them just for buying their next house. People seeking to move for work have less potential suitable housing stock available to them.

Insisting that developers sell a proportion of any development for far less than cost simply adds the amount lost selling those houses onto the prices of the rest, creating a strange situation where affording a house is for the wealthy, or the very poor, but no-one in between.

So, we need more planning permission, abolition of stamp duty, and an end to housing market interference.

  • Comments are not for extended discussion; this conversation has been moved to chat. – Sam I am Mar 8 '18 at 5:42
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I think an as-yet largely unaddressed point is the impact of planning permission. Trilarion mentions land being expensive, but this is true mostly due to artificial limits on supply. As an illustrative figure, an acre of arable Oxfordshire land typically costs under £10,000. With planning permission granted, this can increase by roughly 10,000% to ~£1 million. (source).

The government could reassess the terms of granting permission; housebuilders may lose, where they have bought arable lands in the hopes of waiting/lobbying for planning permission to be granted, but from an economic and indeed a social viewpoint this rent-seeking behaviour is extremely undesirable.

With local authorities having the power to grant small fortunes to landowners, there is also a significant risk of low-level corruption and favour-trading. Returning these powers to central government would also have the benefit of minimising these opportunities.

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As others have pointed out, the affordability of housing is not really linked to house-building profits.

House-buying is limited by:

  • high-demand areas such as London; meanwhile there was a period when Stoke-On-Trent council was selling run-down houses for £1 on the condition that the owners renovate and live in them. Until the economy is more widely distributed it will be impossible to make London affordable as people will simply move there and bid up prices. Unless there are wildly unacceptable moves like internal passports or the Chinese "Hukou" system. Actually achieving this is a whole other question.

  • availability of credit. Money is still cheap, but the thresholds have been pulled up after the 2008 mortgage crisis.

  • availability of deposits. Buyers have to save up at least a year's salary, which is difficult when the most profitable savings vehicle is .. housing. And few workers have substantial spare money for savings.

  • availability of efficient, reliable, low-tax savings vehicles for the older generation. A huge part of the buy-to-let market is people looking for somewhere to put their pension savings. Since pensioners need to turn a lump sum into 20-30 years of inflation-proof income, this looks very attractive.

A blogger I follow presents what he calls the Simple Plan for making social housing affordable, basically by removing all the artificial obstacles to councils operating their own housing association funded by the existing stream of Housing Benefit payments.

Measures to remove foreign capital from empty properties would be very popular and a good idea but not make a huge difference to the situation.

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    Links can break over time. The linked strategy somehow calls for some kind of leveraged financing of public construction? – Trilarion Mar 5 '18 at 15:43
  • Yes - get local authorities, especially London, to run municipal housing associations, based on the income from Housing Benefit, low-risk bond financing, and some of the existing "fix the housing market" funds. – pjc50 Mar 5 '18 at 20:04
  • The main thing the Government can do to make housing more affordable is to make it easier to borrow money for mortgages. Unfortunately, this is also the main reason prices are going up -- as most people judge affordability not by the total price, but by the monthly payment. – Jennifer Mar 7 '18 at 6:28
  • Someone at the beginning of their work/accumulation cycle can absorb the cost, but pensioners who could have bought a place outright in a normal market are shut out. I've noticed that the exploding price of housing in major cities is a worldwide phenomenon, not just in London and San Francisco. Quantitative easing is the process of introducing new money into the economy to combat recession, and that is what is driving cheap money. – Jennifer Mar 7 '18 at 6:28
  • Pensioners either already own homes or are never going to. Most mortgage companies won't allow a mortgage with a final payment date that extends past normal retirement age. It's far more common to go in the other direction with "equity release" etc. – pjc50 Mar 7 '18 at 10:04
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in which it was stated that house prices in the UK are about 10x average earnings

House prices in the UK really fall down into two categories: those in London (by that I mean anywhere in South-East England) and everything else. London has the highest property prices in the country by far and that's where you get such insane statistics. Move down to Liverpool or Manchester or Edinburgh and the pricing is a lot more reasonable. Keeping that in mind...

But how on earth can it politically be achieved without gutting a major sector of the economy and its employees?

The answer for London is: it can't. If you somehow manage to decrease the property prices in London while increasing the supply, more and more people will move to London from the rest of UK and the EU, until the prices are right back where they've started. The potential for growth in London is only limited by the amount of housing available and you could easily build it up to Tokyo levels of density without breaking a sweat. No matter what you do living in London will remain expensive in the long term, simply because its the most attractive city in Europe, by far. Of course we could speculate about investing into other European cities to turn them into world-class centers of economic activity, but that's going too far into fantasy land.

The answer for the rest of the country is: increase supply. Reduce taxes, reduce the power of local councils to restrict construction, remove red tape, make financing easier to get, ban foreign investors, encourage construction of affordable housing etc. This is all covered in answers posted before mine.

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    @Trilarion you don't need any special treatment - current prices already keep people away. All that's needed is an open declaration stating that London is simply a luxury that's not for everyone. – JonathanReez Mar 6 '18 at 8:26
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    The problem is not taxes. Reducing taxes also reduces the possibility of public spending, which can be used to create affordable housing. More market is not the solution. – Martin Schröder Mar 6 '18 at 8:46
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    @MartinSchröder if you double the housing stock in England over the period of 20 years there will be a huge crash and prices will fall down to a reasonable level. The government doesn't need to build affordable housing - it needs to flood the market with housing until everyone can buy on their own. – JonathanReez Mar 6 '18 at 17:01
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    Painting British house prices as "London is insane; everywhere else is just fine" is a gross simplification. The south-east as a whole is very expensive, because anywhere within a vaguely commutable range of London has high demand from people wanting to live there and save money versus living in London. – David Richerby Mar 6 '18 at 18:02
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    "South-east England" would be a whole lot clearer... – David Richerby Mar 6 '18 at 19:23
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In general, the problem with housing costs is regulation to prevent neighborhoods from changing. When formalized, this kind of regulation is called zoning. What it does is say that in such and such a location, there can be only single family houses or small shops or industrial or whatever.

The obvious counter to that is that limiting industrial to particular locations makes it easier to avoid pollution. This is of course true, but it doesn't explain why we must also limit parts of the city to single family homes. The United Kingdom does not call it zoning, but its planning process has much the same effect. Areas that currently have single family homes continue to have single family homes. So high-density development only occurs in places where it already is.

Single family homes use a comparatively large amount of land for a small amount of building. If you replace eight single family homes with one high rise, the number of families served can easily increase by a factor of ten.

Consider eight three story houses. Just the first five stories of the high rise can potentially hold the displaced families (assuming the first two stories are used to hold shops and the property management offices). Now add another thirty stories and you've added enough space for ten times that many families. And that's assuming that all the families in the high rise use the same amount of space as the families in the houses did.

If the single family homes had any ground level outdoor space, it can be preserved as a park. It will now be shared space, but it's still space. The ratio of people to space may increase, but the ratio of outdoor space to space covered by buildings can stay the same. In fact, the amount of outdoor space covered by plants may actually increase. Paved driveways and patios can be replaced with an actual park.

We don't actually need high rises to increase density and lower rents. Even replacing ranch homes with five story replacements can give a big boost to population density.

Another benefit to replacing single family homes with multi-family buildings is that it relieves the pressure to replace multi-family buildings. As existing multi-family buildings age, they become cheaper. Less affluent families can afford them. If those buildings are knocked down, then they never age into places that moderate income people can afford. And that's the real problem. Expecting builders to build cheap housing is unreasonable. It's far easier to build luxury housing and let it become cheap housing over time.

Affordable housing is a subsidy for rich people. They look around and see new housing that they can afford. Because they are rich, they can use their money to get into affordable new housing. But then they don't feel the pressures of the problems they help create. Let builders build luxury homes. The rich will move to them. Then the homes from which they moved will be sold to less rich people.

Building brand new houses for cheap rich people is not nearly as effective as letting cheap rich people choose between cheaper older houses or more expensive new houses. Because brand new houses should be expensive. They cost to build. If rich people have to choose between expensive brand new and cheap older housing, many will choose the brand new. But if you make them choose between cheap new housing and expensive new housing, many will choose cheap.

Don't let the rich use their money and connections to crowd out the people that affordable housing is supposed to help. Make them choose. Pay for expensive new buildings or take the cheapness of older buildings.

Perhaps this sounds great to you, and you're wondering why it doesn't happen. The answer is entrenched interests. The people living in the current eight family homes often don't want to move into a high rise. It's not the space, but the relative privacy. They don't want to share walls with their neighbors. They don't want their top floor ceiling to be someone else's floor. Perhaps they don't want their bottom floor to be someone's ceiling.

Even if we handle those eight families, what about their neighbors? They don't want the extra traffic (both pedestrian and vehicle). They don't want to spend their days in the shade of high rises. These people tend to be relatively wealthy and interested. The net result is that they dominate the planning boards that handle zoning exceptions. This is how restrictive zoning (under whatever name) becomes the policy.

  • Note that building more high-rise buildings is likely to be off the table for a while. – Steve Melnikoff Mar 6 '18 at 9:38
  • +1, that's the real answer for most of the Western world. I always laugh when e.g. San Francisco residents protest against high property prices instead of trying to bring down zoning regulations. – JonathanReez Mar 6 '18 at 17:11
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By far the largest expense in building a low-cost house in the UK is the cost of land. A simple, no-frills home can be built for an outlay of around £50,000. The land to build it on, in most places in the UK, will cost around £60,000 to £70,000. Cost of finance, selling the result, and legal costs along with expected profits of construction companies put the minimum viable price of such a house up to about £130-150,000.

The simple answer is to reduce the cost of land. Land is expensive because it is in short supply, largely due to government regulation. Reducing planning regulation in order to double the supply of land should reduce its cost by a substantial percent, which should be reflected in the cost to purchase low-end housing. Higher-end houses would be less effected by such a change, but would still drop a little.

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    Land is only expensive in areas where houses are expensive and planning permission is likely or already given. If you want to live in the middle of nowhere and not get planning permission, land is cheap. – Separatrix Mar 7 '18 at 14:37
  • @separatrix - If you don't get planning permission, you can't (legally) live there. And there's a reason people don't want to live in the middle of nowhere: people need to get to places of work, shops, etc. Middle of nowhere locations often make that difficult or even impossible. – Jules Mar 7 '18 at 23:11
  • You can live there in a van, you just can't build. Also a simple house can be bought for £30,000 if you look in the right part of the country (try round Grimbsy). This still comes back to location, not land. There are not enough properties where people want them. – Separatrix Mar 8 '18 at 8:00
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Constructing a nice house is quite expensive. Being able to afford this is a wealth that has to be created first. A strong economy with skilled, highly paid workers is probably an essential requirement.

What can the government do about it?

  • Invest in education
  • Keep taxes low by not squandering the taxpayer money.
  • Maybe lower safety and environment standards to lower building costs (but this may be a very dangerous road to go down, see Grenfell tower fire in 2017).

Land is scarce and very expensive to buy in highly populated areas like South England. This really drives up the costs. In some areas, there is simply not much more space available. And there should be some land left for recreation or just for natural reserves.

What can the government do about it?

  • Not much, maybe encouraging migration to the North by diverting resources and administration centers from South to North England (and Scotland)

The house price is also determined by supply and demand. If many people want a house, but there aren't enough, prices will go up.

What can the government do about it?

  • Aim at increasing supply by financially supporting the building of new houses (maybe by tax advantages and cheap loans)
  • Support families with children financially if they want to build a house
  • Tax unused/undeveloped property really, really high
  • Tax home property which is not directly used by the owner really, really high
  • Provide new areas for housing
  • Build houses yourself and sell them

If lots of more houses are built, the prices of existing houses will go down too.

The alternative - what is "affordable housing" really?

Housing maybe doesn't mean having your own mansion. Aiming smaller (smaller living space, more highly integrated and densely packed) may reduce costs and land requirements, so that a smaller kind of wealth is more easily affordable. Small housing is probably more affordable housing.

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    Some of this seems highly subjective and opinion-based... – Trotski94 Mar 5 '18 at 13:46
  • @JamesTrotter Agreed. It's an opinion. It may not work and others surely think different. Any particular bits that stand out? I'd be happy to give more motivation. – Trilarion Mar 5 '18 at 13:52
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    Building a decent house is actually NOT very expensive. It's the cost of the land and the location that drives up the price. This is obvious from the difference in price of a house from one location to another. The building costs don't change much. – DJClayworth Mar 5 '18 at 14:48
  • "A strong economy with skilled, highly paid workers is probably an essential requirement." I don't agree with that, it's not the requirement, it's the problem. In areas without a lot of high income jobs you can get a much nicer house very much more affordable. – Pieter B Mar 5 '18 at 14:50
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    @Trilarion a weak economy with less high income jobs makes more nice houses affordable. In regions where a lot of people have high income jobs houses become crazy expensive. I live in an area with a lot of high-income jobs and for people with medium income jobs it's become impossible to find housing. – Pieter B Mar 5 '18 at 15:22
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So long as demand for housing remains insaitable (people want a better house in a better location), interest rates cause housing prices to scale.

Historic multipliers of housing price compared to income are based off of (A) more single earner homes than today, and (B) a higher interest rate environment.

Trying to keep that multiplier down in a situation where the fundamentals are different is like trying to hold back the tide; worse, it is like trying to hold back 17 tides all approaching along different dimensions, which are usually held back by each other.

Push down one cost, and other costs grow to compensate: if it cost 25 pence to turn a plot of land into an awesome mansion, then the price of "good" land to put mansions on would skyrocket.

That being said, the answer in general is more supply. Increase supply, even of premium homes, and the price of housing will fall.

As a government, there are many ways too boost supply. You can construct homes yourself, fund construction by tax dollars, and hand them out any which way you choose (so long as they aren't demolished).

You can reduce regulator burden on building homes. This can be anything from permitting smaller, cheaper, crappier built homes to count as a home, to blanket approval for construction in an area, to streamlining environmental assessments.

You can double-check there is healthy competition in the home-building industry, and if not break up some monopolies.

You can reduce regulated input costs to build homes; make it cheaper to import low cost labor and materials.

You can do public projects that increase home quality, like transit improvements (which can open up a whole bunch of new land from being marginal places to build homes to being great places to build homes, thus increasing supply).

You could even raise interest rates, tighten mortgage rules, or discourage two-income households.

Many of these are going to have side effects that you don't want.

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    What would be the benefits of discourage two-income households? More people living in the same house should mean that there is less demand, leading to lower prices. – SJuan76 Mar 5 '18 at 17:21
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    @SJuan76 If your goal is to lower income to house dollar value, having the people in the houses have less money per house to spend. Doesn't mean there will be fewer people in the house. Prior to women entering the workforce, there was less income per house, but the same number (or more) of people per household. And yes, this also makes GDP drop; many of these are going to have side effects you don't want. – Yakk Mar 5 '18 at 17:56
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Make public transport significantly cheaper. People can then travel further at an affordable cost.

Subsidise certain professions/areas such as a nurse in central London (aka London weighting, or shared ownership).

Balance migration properly by importing only workers with needed skills (Doctors, not car washers!). No, it's not racism, it's sensible economics; get over it.

Don't expect to buy your house as soon as you come out of uni.

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    Are immigrated car washers or immigrants with otherwise unneeded skills without home property really a significant part of the problem? How many are there? – Trilarion Mar 5 '18 at 15:45
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    If the immigrants can pay for a house, they are producing more than the value of the house. If they cannot, they are not part of the demand so they are not a reason for the rising prices. – SJuan76 Mar 5 '18 at 17:19
  • @SJuan76 - Your logic makes no sense. If they can pay for the house...Each person that isn't there means 1 less person demanding property. The fewer people that aren't there means less demand , ergo lower prices. If immigrants can't afford a house but supply the labor then they are still enabling people to mass in the city. If they weren't available in the city then businesses would be forced to flee to the suburbs for more abundant and affordable labor, making the city less desirable. Thus, dropping prices. An abundant and cheap workforce is certainly part of the problem. – Dunk Mar 5 '18 at 23:17
  • @SJuan76 Except that people who can't pay for houses get them provided by the government, the government is the demand in those cases. – MrLore Mar 6 '18 at 12:15
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Is it even possible for a government to control the price of houses when they are sold? I guess they could dictate to constructors, but it's less easy to tell individual homeowners what they can ask for their house.

If it is possible, then how about this approach...?

Over the next N years, mandate that house sale prices go down by X% each year. At the same time mortgage lenders must reduce the size of existing mortgages by the same percentage. The borrower is therefore protected from negative equity and benefits from lower interest. The lender suffers, because they bought the money to lend at one price and will now possibly get less back. Possibly they bought it from overseas (outside our jurisdiction). But, if the government sets N and X well, the lender doesn't have to go out of business and this could be described as them "paying back the taxpayer for the bail-out we gave them in 2008".

  • The problem with mandating maximum prices is that it reduces the profit margin of the companies which build houses. That discourages them from doing so. That means less houses get build. That means you could theoretically buy a house for a cheap price but practically you won't find one on the market. – Philipp Mar 7 '18 at 16:21
  • @Philipp does reducing the profit margin discourage them? Certainly if you reduced it so much they made a loss, that would discourage them. But you could argue that reducing the profit margin encourages more building so they can maintain their overall profitability. – Martin Mar 7 '18 at 16:24
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    It's not just 'a loss' that could discourage them, but the fact that doing something else with their resources could be more profitable. If I can by law only make a 2% return(but still have the risk of losing my money) on making a house, why would I do that if I could open a grocery store and make 3%. – Jack Of All Trades 234 Mar 7 '18 at 20:37

protected by Philipp Mar 5 '18 at 20:37

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