# Saving or investing for down payment



## nathan79 (Feb 21, 2011)

To preface this, I still believe that the housing market is due for a substantial correction in the next 6-12 months, but I'm willing to accept that I may be wrong. Under normal circumstances I think a correction would be baked-in, but the amount of government intervention is unprecedented. It's difficult to anticipate what they'll do next. As of August, average home prices in Greater Vancouver are up roughly 5% YOY. That's not a significant amount, but I'll be keeping a close eye on how the numbers trend over the coming months.

I've been saving for a principle residence since 2016. I had a decent amount of cash already set aside, so I figured it would only take me 1-2 years to save up the necessary down payment. However, prices around here went up quite significantly from 2016-2018, so my timeline was pushed further into the future. After four years, I'm basically back to where I started. That is, I figure it will take me another 1-2 years to save up the necessary down payment, and that's assuming home prices don't increase faster than inflation. If there's another run-up in home prices, then it could take significantly longer.

The conventional wisdom is to never invest money you're going to need within 5 years, but in the current environment I'm beginning to think it's financial suicide to NOT be invested.

I could attempt to hedge a home price increase by investing 25% of the money into Canadian bank stocks -- if the housing market goes crazy, the banks are going to do very well. On the other hand, if the housing market tanks, bank shares could drop 50% in value. But since I only invested 25% of my capital, I'd only be down 12.5%, minus any dividends. In such a scenario, home prices would likely decrease more than 12%, meaning I'd still be ahead... though not as far ahead as if I'd stayed in cash.

Alternately, I could just invest all of the money into something very low-risk such as Tangerine's Balanced Income Portfolio (70% bonds, 30% stocks). However, I feel like the bonds would give minimal upside potential, and it could also drop if there's another big correction in stocks.

The last option I can think of is to put off the home purchase indefinitely, and just invest the money in whatever suits my risk tolerance. I think 5-10 years should be long enough to wait out any corrections in the market. If I did happen to see an opportunity along the way, I could still take advantage of it.


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## Topo (Aug 31, 2019)

It is very difficult to time any efficient market, be it equities, interest rates or real estate. If you are intent on buying a residence in the next 6-12 months, the best place for the down payment funds will be a HISA. 

It is very difficult to predict a correction, let alone time one. There is no reason that houses couldn't go up another 20 percent, before correcting a mere 10 percent and then heading back up. If you plan to buy anyway, you would be better off doing it when it is feasible to you. However, if your decision on buying a house is predicated on a correction or crash happening (you won't buy if there is no pullback), then you could take a bit more risk because the time frame is more uncertain and you may have more years to accumulate funds.


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## Just a Guy (Mar 27, 2012)

The housing market has been overpriced for several decades and hasn’t corrected. I agree it’s due, but predictIng when it’ll correct is nearly impossible. The nice thing is, not all houses are overpriced, I suggest contacting a realtor, tell him your price point and have home send you listings which meet your criteri. That’s how I find my cheap rentals. I’m imformed when any one bedroom places are listed under 75k, I watch the ones of interest to see if they don’t sell, that’s where days on the market information is handy. If it doesn’t sell quickly I can go in make an unconditional offer and probably pick it up cheap. I’ve picked up several this year using this technique. I’ve got the realtor sending me information on all the different things I’m interested in foreclosures under 400k, 2 beds under 100k, three beds under 120k, etc.


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## nathan79 (Feb 21, 2011)

Topo said:


> It is very difficult to time any efficient market, be it equities, interest rates or real estate. If you are intent on buying a residence in the next 6-12 months, the best place for the down payment funds will be a HISA.
> 
> It is very difficult to predict a correction, let alone time one. There is no reason that houses couldn't go up another 20 percent, before correcting a mere 10 percent and then heading back up. If you plan to buy anyway, you would be better off doing it when it is feasible to you. However, if your decision on buying a house is predicated on a correction or crash happening (you won't buy if there is no pullback), then you could take a bit more risk because the time frame is more uncertain and you may have more years to accumulate funds.



True... I firmly believe in saying "don't time the market, time your finances".

As far as predicating my decision on a correction... obviously, a correction would mean I pull the trigger sooner than later. The 1-2 year timeframe I quoted is assuming prices stay relatively flat. If prices accelerate more than 5% a year, they are effectively outpacing my ability to save.




Just a Guy said:


> The housing market has been overpriced for several decades and hasn’t corrected. I agree it’s due, but predictIng when it’ll correct is nearly impossible. The nice thing is, not all houses are overpriced, I suggest contacting a realtor, tell him your price point and have home send you listings which meet your criteri. That’s how I find my cheap rentals. I’m imformed when any one bedroom places are listed under 75k, I watch the ones of interest to see if they don’t sell, that’s where days on the market information is handy. If it doesn’t sell quickly I can go in make an unconditional offer and probably pick it up cheap. I’ve picked up several this year using this technique. I’ve got the realtor sending me information on all the different things I’m interested in foreclosures under 400k, 2 beds under 100k, three beds under 120k, etc.


Good point, I should talk to my realtor and a mortgage broker to see exactly where I stand. I've just been playing with the bank caculators in terms of qualifying for a mortgage, but it would help to have a professional opinion.


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## Just a Guy (Mar 27, 2012)

the housing market is crazy. I literally bought two properties last month for 45k each and a developer decided to buy the entire complex and offered me 80k each this month. Why he didn’t buy them when they were listed is beyond me, but I’ll take his money (I also already owned a unit in there that I paid 70k for several years ago, he offered me 90k for that). Easiest 250k I’ve made in real estate. With the stock run up, I made even more with those in the same time period. I don’t own Any bonds Though, so I’ve missed out on them not making money lately.


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## fireseeker (Jul 24, 2017)

Just a Guy said:


> the housing market is crazy. I literally bought two properties last month for 45k each and a developer decided to buy the entire complex and offered me 80k each this month. Why he didn’t buy them when they were listed is beyond me, but I’ll take his money (I also already owned a unit in there that I paid 70k for several years ago, he offered me 90k for that). *Easiest 250k I’ve made in real estate.* With the stock run up, I made even more with those in the same time period. I don’t own Any bonds Though, so I’ve missed out on them not making money lately.


Lucky you. 
Of course, you didn't actually make $250K if the three units cost $160,000.


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## Just a Guy (Mar 27, 2012)

True, but I won’t complain about it. Bought two more since, and can buy one more still for free.


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## james4beach (Nov 15, 2012)

nathan79 said:


> I've been saving for a principle residence since 2016.
> . . .
> The conventional wisdom is to never invest money you're going to need within 5 years, but in the current environment I'm beginning to think it's financial suicide to NOT be invested.


I'll share what I'm doing. I _might_ buy a home within 5-20 years if I find something I like at a good price. Maybe I'll buy one, maybe I won't. Our "time horizons" may be similar. For example, if we saw a brutal housing crash in BC next year, I would absolutely be out there looking for something I like.

In any case, because it's really not clear when I might make a purchase, I decided to keep investing my capital. However, I'm using a low volatility method so that there aren't big fluctuations. This way, I should theoretically be able to cash out my investments at any time without having to worry about depressed prices (like a bear market in stocks). And I like this approach because I might need the money for other things as well, like investing in my own business, so it doesn't really have to be a real state purchase.

The posts in this thread describe the kind of investments I've chosen, but the main point is that I'm using a portfolio with low volatility. My specific holdings are posted here. It's based on diversified asset allocation and the permanent portfolio concept.

I've been happy with this tradeoff. I get a higher return than cash (actually 7% CAGR since I started) with reasonable stability. I feel it's the best of both worlds, and this way I have the option to buy a house or use my capital for business creation, at any time I want *without* being totally at the whims of the stock market.


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## nathan79 (Feb 21, 2011)

Thanks James, I'll take a closer look at those tomorrow.

Do you have any thoughts on the Tangerine Balanced Income Portfolio? With 30% stocks it seems very similar to your asset allocation, minus the gold. Returns are 5.37% annualized over the last 10 years.





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It seems like adding a gold allocation increases returns, but possibly increases risk as well? Again, I'll have to review this more in depth.


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## james4beach (Nov 15, 2012)

nathan79 said:


> Thanks James, I'll take a closer look at those tomorrow.
> 
> Do you have any thoughts on the Tangerine Balanced Income Portfolio? With 30% stocks it seems very similar to your asset allocation, minus the gold. Returns are 5.37% annualized over the last 10 years.


Nice find! This does look similar to my portfolio. It's their most conservative allocation, 30% stocks 70% bonds. Yes this should offer a similar experience to how I invest. Here's their annual returns history for Balanced Income Portfolio and it looks pretty steady so far. A quick calculation shows it would have returned -8% in 2008 which isn't so bad either.


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## james4beach (Nov 15, 2012)

nathan79 said:


> Do you have any thoughts on the Tangerine Balanced Income Portfolio?


It's possible to estimate (through back-testing) how this mutual fund would have done all the way back to 2002. Here's a link to an equivalent portfolio using ETFs. The mutual fund is probably better (and much easier) but the ETF mix will give a rough approximation. However, you'd probably want to subtract about 1% performance per year from all the following numbers

What the back-test shows is pretty encouraging, since 2002:
5.6% CAGR nominal return --> 4.6% after MER
3.5% CAGR real return after inflation --> 2.5% after MER
Worst year was -7% --> as mentioned above -8% after MER

So over the longer term, that's 4.6% CAGR annual performance or 2.5% real return. It's lower than the performance you quoted for 10 years but that's because this longer period includes the 2008 crash whereas 10 years is a very strong period for stocks.

Those numbers may even be a bit pessimistic since the MER difference isn't a full 1% drop... you might subtract 0.5% instead.

I think it's a very sensible conservative allocation, relatively low volatility, and still a positive return after inflation.


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## STech (Jun 7, 2016)

Nathan, I truly believe you should concentrate on the question if you want to own a house or not.

If you want to buy, then focus on your budget and getting the down payment together, explore alternative options, etc.

If you're not going to buy, then focus on your investments and maximizing those. Owning a home isn't for everyone, and certain individuals grow their net worth faster and greater by not owning a home. When you're confused, you won't accomplish either goal and you'll be worse off.


Funny how any threads, over, and over, and over again go something like this. "I know no can predict the future, but I have a good feeling I'll be right". The future will forever and ever remain unpredictable.


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## james4beach (Nov 15, 2012)

STech said:


> Nathan, I truly believe you should concentrate on the question if you want to own a house or not.


That's a good question. How badly do you want one of these things?

If you are pretty committed to buying one, then you might as well look around now because it seems you're going to buy one anyway. However if your mind isn't made up, and you think you might only buy at a lower price but otherwise continue renting, that's a different story.

It's similar to buying other expensive things. I almost bought a new car exactly 12 months ago. I was interested, but not very committed to the idea. So I shopped around, went to a dealership (medium effort) to see what existed. From the options I saw, nothing jumped out at me and they seemed too expensive, so I said -- no thanks, I don't see any cars that I want right now.

And I walked away without a car. That worked out fine, but only because I was not committed to the idea to begin with. I was curious, and looking, but didn't need one badly.


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## Mortgage u/w (Feb 6, 2014)

I think you are overthinking all this. Take your money and purchase the property. 
The Vancouver correction already occurred. Everyone is back in line on the inflation graph. The feds did a good job in avoiding a bubble burst, You can believe this.....or keep waiting for prices to fall.


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## nathan79 (Feb 21, 2011)

Guys, I never said I was confused or unsure about whether I wanted to buy a house.

I could just continue muddling along and saving in an HISA, but it will take me another 1-2 years to save up enough, *assuming home prices don't accelerate in the meantime. *

The question I am attempting to address with this thread is: *"How do you save up for a home, when home prices might go up faster than you can save?"*

My goal is to put myself in a position where my savings can "keep pace" with any increase in home prices. This is *not* about timing the market or trying to predict the future, it's about being flexible to adapt to whatever happens.

As far as alternate options, I've already gone the condo route in the past, and didn't much care for the lifestyle...


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## nathan79 (Feb 21, 2011)

Mortgage u/w said:


> I think you are overthinking all this. Take your money and purchase the property.
> The Vancouver correction already occurred. Everyone is back in line on the inflation graph. The feds did a good job in avoiding a bubble burst, You can believe this.....or keep waiting for prices to fall.


As I explained in my OP, it will take me another 1-2 years to save up enough.


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## Mortgage u/w (Feb 6, 2014)

nathan79 said:


> As I explained in my OP, it will take me another 1-2 years to save up enough.


 Have you considered putting less down? Is that feasible?


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## nathan79 (Feb 21, 2011)

Mortgage u/w said:


> Have you considered putting less down? Is that feasible?


I need to put about 60% down, otherwise the monthly payments will be pretty tight.


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## STech (Jun 7, 2016)

nathan79 said:


> I need to put about 60% down, otherwise the monthly payments will be pretty tight.


Post some numbers and you'll get some numbers. Seems like you have options you haven't considered.


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## Mortgage u/w (Feb 6, 2014)

60% is a rather large DP. Good for you to have saved up a large sum in order to have a small mortgage. Most first time home buyers barely have the required 5% and accept a very large mortgage.

You do have options here. I always recommend to put less down and once the purchase is done and you're all settled in, any left over cash can always be applied to your capital. The idea is to remain flexible.....there are many unexpected costs when buying so keeping some cash available is always a good idea.


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## nathan79 (Feb 21, 2011)

Okay, I make about 60K gross per year, which is about $3800/mo after tax.

Cost of home is 800K... down payment @ 60% down is 480K, which gives a mortgage of 320K @ 1.99%.

Monthly payment: $1354
Property tax: $300
Utilities: $150
Insurance: $50
Cable, phone, etc: $125
Maintenance: $200 (I can do most things myself)

Total: $2179


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## STech (Jun 7, 2016)

nathan79 said:


> Okay, I make about 60K gross per year, which is about $3800/mo after tax.
> 
> Cost of home is 800K... down payment @ 60% down is 480K, which gives a mortgage of 320K @ 1.99%.
> 
> ...


How much do you currently have saved up for the downpayment?

Is this a house you're looking at buying? Can you rent a portion out?

Have you considered a 30 year amortization vs 25? 

A further examination of your situation is obviously required, but don't be surprised to learn that you might be better off to put down less, have money for emergencies and living, and the rate of house appreciation outpaces the house carrying costs. The numbers work out even better if you're no longer paying rent, and instead having a renter help. Not to mention you could be eligible to deduct certain expenses as you claim the rental income.


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## Mortgage u/w (Feb 6, 2014)

nathan79 said:


> Okay, I make about 60K gross per year, which is about $3800/mo after tax.
> 
> Cost of home is 800K... down payment @ 60% down is 480K, which gives a mortgage of 320K @ 1.99%.
> 
> ...


Putting your mortgage on 30 years gains you an extra $50k. For roughly the same payment, you would obtain a mortgage of $370k so DP would reduce to $430k.

30 years may seem long, but you have more cash on hand. As you save more money, take advantage of prepayment options and apply extra cash to your capital which automatically shortens your amortization. As your income increases, you can double-up payments, apply accelerated payments or increase your payments - all dramatically reduce your amortization.


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## james4beach (Nov 15, 2012)

nathan79 said:


> Cost of home is 800K... down payment @ 60% down is 480K, which gives a mortgage of 320K @ 1.99%.


nathan, curious: would you consider renting a house instead of buying? Apologies if I missed a response earlier on that.


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## nathan79 (Feb 21, 2011)

James, I have looked but it seems like renting would cost just as much as (or possibly more than) buying. Houses in the Fraser Valley seem to rent for between $2200 and $2500 a month, at the low end. Perhaps you could find something for less, but there would probably be a good reason for that.


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## nathan79 (Feb 21, 2011)

I didn't consider the 30 year mortgages as not all banks offer them... but I agree, that is something I could look at. Definitely seems to change the math a bit.

I have about 440K saved up...


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## STech (Jun 7, 2016)

nathan79 said:


> I didn't consider the 30 year mortgages as not all banks offer them... but I agree, that is something I could look at. Definitely seems to change the math a bit.
> 
> I have about 440K saved up...



You have a tonne of runway available. You're just not considering your approach correctly. 

Call up a mortgage broker your friends and family might recommend. You'll be surprised by the number of options available to you.


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## Spudd (Oct 11, 2011)

nathan79 said:


> James, I have looked but it seems like renting would cost just as much as (or possibly more than) buying. Houses in the Fraser Valley seem to rent for between $2200 and $2500 a month, at the low end. Perhaps you could find something for less, but there would probably be a good reason for that.


You'll be spending almost $2200 on monthly costs if you buy (although part of that will be principle), PLUS spending 480k on the downpayment. 480k is the equivalent of $1600/mo using the 4% rule. So your rent would really be $600/mo if you count in the fact that you don't have to spend the 480k. I know you'll get back the 480k eventually when you sell the place, so it's not entirely a fair comparison, but it is something to think about. That 480k will keep compounding in investments if you decide not to buy.


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## Mortgage u/w (Feb 6, 2014)

nathan79 said:


> I didn't consider the 30 year mortgages as not all banks offer them... but I agree, that is something I could look at. Definitely seems to change the math a bit.
> 
> I have about 440K saved up...


I don’t know any bank that _doesn’t_ offer 30 years. The only time it’s not offered is if you are putting less than 20% down.


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## nathan79 (Feb 21, 2011)

My bad... I was lead to believe that they are less common than they perhaps are. For some reason, Tangerine won't let me enter 30 years no matter how big of a down payment I enter.


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## Mortgage u/w (Feb 6, 2014)

Tangerine’s calculator is not very complete. I guess they figure most people put less than 20% down so not to get anybody's hopes up, they limit the calculator to 25 years. 

Most other calculators include loan to value so you will get the option to change amortization accordingly.


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## james4beach (Nov 15, 2012)

nathan79 said:


> James, I have looked but it seems like renting would cost just as much as (or possibly more than) buying. Houses in the Fraser Valley seem to rent for between $2200 and $2500 a month, at the low end. Perhaps you could find something for less, but there would probably be a good reason for that.


That sounds like a pretty good deal to me. A whole house?

To me that sounds attractive versus buying and taking on a big debt. Plus all the maintenance costs, transaction friction (buying & selling), property taxes, plus being stuck in the place with no ability to ditch it if you don't like it. And did I mention the weight of having a mortgage?

As @Spudd mentions, if you rent, then you also have a massive amount of money that can be invested. And you can actually invest it in a diversified portfolio, instead of pumping it all into a single house.

I think you might be underestimating maintenance costs at only $2400 a year. It costs a lot of money to maintain a home due to occasional but guaranteed major expenses. It doesn't necessarily happen in the first year or two, but eventually you get dinged by those and I think they average out to a lot more than $2400 a year based on what I've seen with my family's properties.

Both paths are valid -- doable -- but myself, I would rent the house at $2200 - $2500 and keep investing my money, and not take a mortgage. Though I will admit a big factor here is what I think I can get from my investments, and my comfort with market investments.

If you ask anyone in banking or lending, they will of course tell you to get a mortgage.


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## Juggernaut92 (Aug 9, 2020)

nathan79 said:


> I didn't consider the 30 year mortgages as not all banks offer them... but I agree, that is something I could look at. Definitely seems to change the math a bit.
> 
> I have about 440K saved up...



Props to you for saving that much money. I am curious are you holding that in a HISA or is it in the stock market?

Also, if you have the discipline to save up that much money I am betting you have other useful skills as well. Would it be possible to shop around for a job that pays you more than what you currently make? I know now is an awkward time to be switching jobs because of covid.


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## Money172375 (Jun 29, 2018)

nathan79 said:


> Okay, I make about 60K gross per year, which is about $3800/mo after tax.
> 
> Cost of home is 800K... down payment @ 60% down is 480K, which gives a mortgage of 320K @ 1.99%.
> 
> ...


I need to move to BC. The property tax, utilities and insurance seem low For a $800k home.


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## nathan79 (Feb 21, 2011)

Money172375 said:


> I need to move to BC. The property tax, utilities and insurance seem low For a $800k home.


I might need to tweak the insurance a bit, but the other numbers are based on what my mom pays for her 1500 sqft house on a 6000 sqft lot.


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## nathan79 (Feb 21, 2011)

Juggernaut92 said:


> Props to you for saving that much money. I am curious are you holding that in a HISA or is it in the stock market?
> 
> Also, if you have the discipline to save up that much money I am betting you have other useful skills as well. Would it be possible to shop around for a job that pays you more than what you currently make? I know now is an awkward time to be switching jobs because of covid.


Thanks! 

All but a small portion of it is in HISA's. I followed the conventional wisdom to not invest any money you will need within five years. But with governments on the pathway to modern monetary theory, I'm not sure that advice is even relevant anymore.

I'm definitely going make some kind of decision within the next 6 months... I might just dump most of it into some kind of stock portfolio.

My job is kind of a niche area... positions do come up, but the pay is generally pretty close, or a bit less than what I'm already making.



Thanks to everyone who provided advice wrt to mortgages, etc.


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## Juggernaut92 (Aug 9, 2020)

nathan79 said:


> Thanks!
> 
> All but a small portion of it is in HISA's. I followed the conventional wisdom to not invest any money you will need within five years. But with governments on the pathway to modern monetary theory, I'm not sure that advice is even relevant anymore.
> 
> ...


Thanks for sharing. That is a lot of money in a HISA but it makes the most sense. I see. Then switching jobs would not make too much of a difference. Either way good luck with either option you choose (buying a house or investing into stocks).


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