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What engine should I use for my game? (A look at the engines behind the most popular games on Steam)

The following is taken from a blog post I made looking at the engines of popular Steam games. The content is essentially the same, although the tables in the blog post are column sortable. If you're short on time, the last table (Popular, Recent) is maybe the most interesting.
One of the most common question on /gamedev is "what engine should I use for my game?" It seems to come up almost daily.
Spoiler Alert: I'm not going to tell you what engine to use. But I am going to do a survey of the engines used by popular games. Looking at quality games in your chosen genre should give you an idea what is at least possible with an engine.
  • I'm focusing on games released on Steam, the largest market for desktop games and a likely target for solo and small developers.
  • In my research I looked at a lot of games quickly and was not always able to identify the engine used for a particular title. Hopefully I didn't mis-identify any engines.
What is a game engine? Why are they used?
A game engine is a collection of tools and software libraries that handle functionality that is common across different games. This might include: rendering graphics, physics simulation to handle movement and collisions, audio, etc. An engine allows a developer to implement common functionality very quickly without having to re-invent the wheel at every turn and allows them to focus on the features that make their game unique. They also tend to push developers toward particular development models.
Besides providing baseline functionality, most modern engines also provide a graphical editor to make creation of the game's world and assets easier.
Fretting over which engine to use is completely understandable: once you've started development, changing engines becomes progressively more difficult. Not only will you have to reimplement almost all of the functionality and modify many assets, but every game engine has its unique quirks, bugs and design patterns. Changing engines means throwing that experience out and starting fresh.
So choosing which engine to use is important.
The Most Played Games on Steam
I'll start with a list of the 50 currently most played games on Steam (as of October 2019), along with their respective engines:
Rank Game Engine
1 CS:GO Source
2 Dota 2 Source 2
3 PUBG Unreal 4
4 Destiny 2 Custom
5 Rainbow Six Siege Custom (AnvilNext)
6 GTA V Custom (RAGE)
7 Monster Hunter: World Custom (MT Framework)
8 Rust Unity
9 Team Fortress 2 Source
10 Warframe Custom (Evolution)
11 ARK: Survival Evolved Unreal 4
12 Football Manager 2019 ???
13 Rocket League Unreal 3
14 Sid Meier's Civilization VI Custom
15 Source SDK Base 2013
16 Total War: Warhammer II Custom
17 Euro Truck Simulator 2 Custom (Prism3D)
18 Garry's Mod Source
19 Dead by Daylight Unreal
20 Sid Meier's Civilization V Custom
21 Hearts of Iron IV Custom (Clausewitz)
22 Dota Underlords Source
23 World of Tanks Blitz Custom (CORE)
24 7 Days to Die Unity
25 Terraria Custom XNA
26 Cities: Skylines Unity
27 Path of Exile Custom(?)
28 Europa Universalis IV Custom (Clausewitz)
29 Arma 3 Custom (Real Virtuality 4)
30 Farming Simulator 19 Custom (?)
31 The Witcher 3: Wild Hunt Custom (REDengine)
32 War Thunder Custom
33 Fallout 4 Custom (Creation)
34 Wallpaper Engine ???
35 Stellaris Custom (Clausewitz)
36 Unturned Unity
37 NBA 2K20 Custom
38 DayZ Custom
39 Paladins Unreal
40 The Elder Scrolls V Custom (Creation)
41 Crusader Kings II Custom (Clausewitz)
42 RimWorld Unity
43 The Elder Scrolls Online Custom
44 Stardew Valley Custom XNA
45 Don't Starve Together Custom
46 Counter-Strike GoldSrc (Source Predecessor)
47 Black Desert Online Custom (Black Desert)
48 Age of Empires II Custom (Genie)
49 Assassin's Creed Odysssey Custom (AnvilNext)
50 Factorio Custom
Note: I use the term "custom" to refer to a proprietary engine developed for in-house, even if it is used on more than one title or series.
A few things jump out immediately:
  • Most of them use a custom game engine
  • Most of them were made by a AAA studio and/or were part of an existing franchise
  • The list is dominated by multiplayer games
This makes sense: AAA studios have large budgets both for development and marketing. Sequels have a built-in base audience and have existing technology to leverage. Multiplayer games have much longer playtimes than single player games.
Do not take this list as evidence that you should make a custom engine. If you're reading this, you are probably not a AAA studio with a proprietary engine you've developed over years.
Also, this isn't really a list of what you might necessarily consider "popular" games. NBA 2K20, to pick an egregious example, has a 15% Steam review score. According to Steam 250, that makes it the 2nd most disliked game on Steam, which is not a position one would associate with "popular." While many of the games on the list are legitimately popular, it misses many great games with finite playtimes.
The Most Popular Games on Steam
Speaking of the Steam 250, they use an algorithm that produces an alternative selection of "popular" games. You can read about it here, but in short it looks at the approval rating (% positive reviews) and the number of reviews. So a game with a 89% score out of a 1000 reviews can rank higher than a game with a 90% score out of 100 reviews.
Here are the top 50 and their respective engines:
Rank Game Engine
1 Portal 2 Source
2 The Witcher 3: Wild Hunt Custom (REDEngine)
3 Terraria XNA
4 Factorio Custom
5 Counter-Strike GoldSrc
6 Left 4 Dead 2 Source
7 Stardew Valley XNA
8 The Binding of Isaac: Rebirth Custom C++ (based on original Flash version)
9 Portal Source
10 Euro Truck Simulator 2 Custom (Prism3D)
11 RimWorld Unity
12 Mount & Blade: Warband Custom
13 Doki Doki Literature Club Ren'Py
14 Garry's Mod Source
15 Hotline Miami Game Maker 7
16 BattleBlock Theater Custom
17 South Park: The Stick of Truth Custom
18 Life is Strange Unreal 3
19 Half-Life 2 Source
20 Don't Starve Together Custom
21 A Hat in Time Unreal 3
22 Dishonored Unreal 3
23 Don't Starve Custom
24 One Finger Death Punch XNA
25 Civilization V Custom
26 The Wolf Among Us Custom
27 Iron Snout Game Maker
28 To The Moon RPG Maker XP
29 Tomb Raider (2013) Custom
30 VA-11 Hall-A Game Maker Studio
31 Broforce Unity
32 OneShot RPG Maker XP
33 Undertale Game Maker Studio
34 Counter-Strike: Source Source
35 Katana Zero Game Maker Studio 2
36 Mirror Unity
37 Slay the Spire Java/LibGDX
38 Castle Crashers Flash
39 FTL Custom C++/SDL
40 Fallout: New Vegas Custom
41 Super Hexagon Custom
42 Eternal Senia RPG Maker
43 The Expendabros Unity
44 Saints Row: The Third Custom
45 Slime Rancher Unity
46 Half-Life GoldSrc
47 BioShock Infinite Unreal 3
48 Outlast Unreal 3
49 Hollow Knight Unity
50 The Room Unity
At a glance, it at least looks more like a list of popular games: all the games are both well known and widely praised and clearly meet any reasonable definition for "popular game."
Notice that almost half of them were developed using a custom engine, although Source, Unity, Unreal and Game Maker make multiple appearances each (arguably Source has an unfair advantage being Valve's own engine).
The list is conspicuously dominated by older games, which makes sense: The algorithm favors games with lots of positive reviews. Not only have older games had longer to accumulate reviews, many of them were released during a time when there was dramatically less competition.
Powerful commercial engines have only recently become available to solo developers and small studios. Unity was released in 2005 and was MacOS only until version 3 in 2010. Unreal didn't become available to the general public until 2009. Games often have a development cycle of several years, so the first successful games in those engines didn't start appearing until a few years later.
The Most Popular Recent Games on Steam
Let's look at the 25 most popular games released for 2019, 2018 and 2017. For this lists I removed free games, because in a previous analysis I discovered that price has a moderate inverse correlation with review score. I didn't bother to remove them for the all time list because there was only one (Doki Doki Literature Club). I also added an entry for primary genre.
The notes column points out some games that are not quite free, but extremely low price, as well as NSFW entries.
Year Rank Game Engine Genre Notes
2019 1 Katana Zero GameMaker Studio 2 2D Platformer
2019 2 Slay the Spire Java/LibGDX 2D Roguelike Deckbuilder
2019 3 Resident Evil 2 Custom Resident Evil Engine 3rd Person Shooter
2019 4 Muse Dash Unity Rhythm
2019 5 Risk of Rain 2 Unity 3D Multiplayer Co-op Roguelike
2019 6 Bloodstained: Ritual of the Night Unreal 4 Metroidvania
2019 7 Touhou Luna Nights GameMaker Studio 2 2D Metroidvania
2019 8 Baba Is You Multimedia Fusion 2 2D Puzzle
2019 9 My Friend Pedro Unity Shmup Platformer
2019 10 Unheard Unity 2D Detective Puzzle
2019 11 A Short Hike Unity 3rd Person 3D Exploration
2019 12 异常 Exception ??? 2D Strategy Programming
2019 13 Streets of Rogue Unity Roguelike RPG
2019 14 Dungeon Munchies Unity(?) 2D RPG
2019 15 Gorn Unity VR Action
2019 16 Beat Saber Unity VR Rhythm
2019 17 Fantasy Girl ??? Jigsaw Puzzle $0.99, Sexual Content
2019 18 Oxygen Not Included Unity 2D Base Building
2019 19 Supraland Unreal 4 3D Exploration Puzzle
2019 20 Kind Words Unity Multiplayer Social
2019 21 Amid Evil Unreal 4 3D FPS
2019 22 Nova Drift GameMaker Studio 2 2D Action
2019 23 One Finger Death Punch 2 Unity 2D Beat 'Em Up
2019 24 Hypnospace Outlaw Construct Point And Click
2019 25 A Plague Tale: Innocence Custom 3D Adventure
2018 1 Rimworld Unity 2D Base Building
2018 2 Mirror Unity Match-3 Puzzle $1.99, Sexual Content
2018 3 Celeste Custom XNA Pixel Platformer
2018 4 Dusk Unity 3D FPS
2018 5 Subnautica Unity Open World Survival
2018 6 Dead Cells Heaps.io Pixel Metroidvania
2018 7 Return of the Obra Dinn Unity Puzzle
2018 8 Gris Unity 2D Puzzle Platformer
2018 9 Just Shapes & Beats Unity Rhythm
2018 10 Zup! X ??? 2D Puzzle $0.99, Achievement Hunter
2018 11 Epic Battle Fantasy 5 Flash 2D Turn-based RPG
2018 12 The Forest Unity First Person Survival Open World
2018 13 Nekopara Extra KiriKiri (?) Visual Novel Sexual Content
2018 14 Fox Hime Zero ??? Visual Novel Visual Novel
2018 15 Deep Rock Galactic Unreal 4 Multiplayer FPS
2018 16 The Room Three Unity Puzzle
2018 17 CrossCode Impact/Custom HTML5 2D Action RPG
2018 18 Sabbat of the Witch KiriKiri Z (?) Visual Novel Sexual Content
2018 19 Miracle snack shop ??? Dating Sim Sexual Content
2018 20 Lethal League Blaze Unity(?) Fighting
2018 21 Zup! 8 ??? 2D Puzzle $0.99, Achievement Hunter
2018 22 Steins Gate Custom Visual Novel
2018 23 Super Animal Royale Unity Multiplayer Battle Royale
2018 24 Pit People Custom 2D Turn-based Strategy
2018 25 Zup! S ??? 2D Puzzle
2017 1 A Hat in Time Unreal 3 3D Platformer
2017 2 Slime Rancher Unity 3D Adventure Exploration
2017 3 Hollow Knight Unity Metroidvania
2017 4 Cuphead Unity 2D Platformer
2017 5 Finding Paradise RPG Maker XP 2D Pixel
2017 6 Hidden Star in Four Seasons Custom Bullet Hell
2017 7 Nekopara Vol 3 KiriKiri(?) Visual Novel Sexual Content
2017 8 Divinity Original Sin Custom 3D Turn-based Coop RPG
2017 9 Gorogoa Unity (Originally Java, ported) 2D Puzzle
2017 10 Superflight Unity Flightsim
2017 11 West of Loathing Unity RPG Adventure
2017 12 What Remains of Edith Finch Unreal 4 First Person Adventure
2017 13 Hidden Folks Unity Puzzle, Hidden Object
2017 14 Opus Magnum Custom C# Puzzzle Programming
2017 15 OrbtXL Unity Puzzle $0.99
2017 16 Rakuken RPG Maker XP RPG
2017 17 Planetarian HD SiglusEngine(?) Anime Visual Novel
2017 18 Dungeons 3 Unity 3D RTS
2017 19 Crawl Unity 2D Local Multiplayer Dungeoncrawl
2017 20 Ravenfield Unity FPS
2017 21 Life is Strange: Before the Storm Unity 3D Adventure
2017 22 Senran Kagura Estival Versus Custom Beat 'em up Sexual Content
2017 23 Cat Quest Unity Adventure RPG
2017 24 Angels with Scaly Wings Ren'Py Visual Novel Dating Sim
2017 25 Monolith GameMaker Studio 2D Bullet Hell
Two interesting things jump out immediately:
  • Far fewer recent games used custom engines.
  • Unity, which only had a handful of entries in the Top 50 all-time list, makes up nearly half the popular releases in the past 3 years.
The Major Engines
Game Maker 2
Game Maker 2 Studio is a 2D commercial engine that offers a free 30-day trial, but requires a paid license for use.
The Creator license costs $39/year and has a few limitations such as not being able to disable the splash screen or turn-off their collection of analytics data.
The Developer license costs $99, is permanent and allows disabling of the splash screen and analytics, but doesn't cover consoles.
The Console license costs $399/year.
Development for GMS games is done using visual scripting and/or a proprietary language called GML.
Unity is a commercial engine that's free to use but requires a paid subscription if your studio generates $100k revenue or more per year. Between $100k and $200k the "Plus" model costs $40/month per developer seat. Above $200k requires the Pro model at $125/month.
The free version is identical to the paid version in terms of core features except:
The "dark" skin isn't available It shows their splash screen in builds This second constraint has created an odd paradox: games developed with very low budgets are forced to show the splash screen. This has created an association in the minds of players between Unity and low-quality games. Developers who can afford the Plus and Pro subscriptions don't want the association, and remove the splash screen. Players are left with the impression that low-budget and only low budget games are made with Unity, despite the fact that Unity powers many of the most popular games on Steam.
Development for Unity games is done in C#.
Unreal is a commercial engine that's also free to use, but requires a 5% royalty on revenue above $3000 per calendar quarter. This royalty is calculated based on gross revenue, before any store percentage is taken out.
Epic waives this royalty for games released on their store, although the store is currently invite-only and very selective with about 100 total titles.
Development for Unreal games is done using Blueprints (Unreal's visual scripting environment) and/or C++.
XNA isn't exactly considered a full engine, rather it's an environment that encapsulates many of the low-level tasks required for game development in a .NET framework by Microsoft. Development was discontinued in 2013.
Where's Godot?
Godot is a completely free, open-source engine frequently recommended on /gamedev.
Development is done primarily with a custom language called GDScript, although it also supports C# and C++.
As an open-source engine, developers have complete freedom to change it however they want. Theoretically it is capable of creating great games in any genre. But so far, no popular games have been developed in it yet, leaving it in the position of its eponymous play.
The most likely reason for this is that it is playing catch-up with major commercial engines with budgets in the hundreds of millions of dollars. While it will probably never reach feature parity as long as there is such a huge budget gap, there are plenty of very popular games that do not require any of the most advanced features of Unity or Unreal.
Maybe you can be the first to create a really popular game in this engine. Even developers who don't use Godot gain some benefit of the open-source pressure on the larger engines, encouraging progress and an accessible price point.
Custom Engine
Despite the increasing popularity of third-party game engines, there are still successful, great games being developed with in-house engines (often leveraging frameworks like SDL or Libgdx). It is beyond the scope of this post to evaluate the risks and merits of building your game without a third-party engine.
As I stated in the beginning, I'm not going to tell you which engine to use, but I will give a few suggestions:
  • Given the huge amount of time even a modest game project takes to complete, I would advise downloading and experimenting with an engine to start, based on the genre you hope to make a game in. Do a couple tutorials. If you find the workflow not to your style, try another.
  • Unity is clearly capable of making high quality games in a wide variety of genres.
  • Unreal also has a large portfolio of great games. It has a reputation for being oriented towards 3D FPS games, but there are plenty of solid examples in other genres.
  • Game Maker Studio has a reputation for being easy for beginners but capable enough that several very popular games have been developed in it. It is primarily designed for 2D games and its 3D capabilities are limited.
  • Making a good game requires a lot of work. Powerful engines do a lot of that work for you, but it has become a Red Queen problem: they've enabled so many people to make games that the bar for quality keeps rising.
Regardless of the engine, expect to encounter a lot of challenges, frustration and hair-pulling bugs. If you're not able to push through that, you're not ready to make games. But if you are, creating an experience that brings players joy is one of the best feelings.
Thanks for reading, hopefully this research proves useful for at least one dev grappling with this question!
submitted by justkevin to gamedev

Impact of the Pandemic on Key Canadian Household Financial Indicators

Source: TD
Ksenia Bushmeneva, Economist
Dated May 14th, 2020


  • Canadian household finances were stretched coming into this year and will face a serious test from COVID-19.
  • Temporary income replacement and debt deferral programs will go a long way in helping households whose livelihood has been impacted by the pandemic. Still, economic disruptions brought about by the pandemic will leave a lasting mark on household finances and indicators of financial wellbeing.
  • On the one hand, debt servicing costs are expected to decline precipitously. Household wealth has also taken a hit, but robust gains over the past decade should provide a financial lifeline during the downturn.
  • On the other hand, the saving rate is expected to increase as households reduce spending and ramp up precautionary savings due to elevated economic uncertainty. While debt growth is likely to slow, the short-term shock to disposable income is likely to push up the debt-to-income ratio in the near-term. Together, a higher saving rate and leverage ratio suggests increased downside risk to the outlook for consumer spending.

Chart 1: Unemployment Rate Surges in April
  • Canadian household finances, which have long been a source of economic vulnerability, will face a serious test this year from the COVID-19 pandemic. Since mid-March, non-essential businesses across the country have been ordered to close, leaving millions of people out of work (Chart 1). While the government moved in quickly to roll out temporary income replacement programs to support households whose livelihood has been impacted by the pandemic, these programs will not fully replace lost income. We expect it will take until at least the second half of 2021 for the unemployment rate to return to its pre-crisis level, suggesting that the economic pain will linger for some time to come.
  • Needless to say, the disruptions will leave a mark on key metrics of household financial health. In this report, we outline our expectations for saving, borrowing and wealth with the caveat that forecasts are clouded by larger-than-usual uncertainty. However, while we may have less precision hitting the exact numbers, directional movements should still provide a useful benchmark for the months ahead.

Saving Rate Expected to Rise

Chart 2: Saving Rate to Remain Elevated Post Crisis
  • The low saving rate of Canadian households has received significant attention among analysts and the media. The personal saving rate hovered near 2% during the 2016-2018 period, falling to as little as 1.8% in 2018 – equivalent to just $852 per household.1This is not necessarily as troublesome as it may seem. It is well known that Canadians have accumulated significant wealth over the last decade thanks to brisk gains in home prices and equities. This increase in wealth is one explanation for the lower saving rate. On the one hand, wealth gains may have reduced the need for households to save out of personal income. On the other hand, gains in net worth also boosted household spending as they tapped into their wealth, with higher consumption in turn leading to lower saving rate.
  • Research from the Bank of Canada has found a significant positive relationship between home equity extraction and consumer spending in Canada.2 As wealth gains slowed toward the end of 2018 and into 2019, consumer spending moderated and the saving rate edged higher, rising to 3% by end of 2019. In addition to the wealth effect, higher interest rates on GICs, and some precautionary motives – an increased willingness to pay down debt amid rising debt servicing costs and a need to save more for larger down payments post-B-20 regulations for example, could have also impacted households saving behavior last year.
  • The precautionary savings motive will become even more important this year as households face employment and income uncertainty, as well as a drop in wealth. The saving rate likely spiked in the second quarter due to an abrupt drop in consumption as a direct result of quarantine measures, but even as the economy stages a recovery in the second half of 2020 and into 2021, it is likely to remain elevated (Chart 2). High household indebtedness will likely further exacerbate households’ savings response, as consumers keep a tighter grip on their purse strings even with rock-bottom interest rates. Indeed, research has shown that monetary policy and low interest rates are less effective in boosting consumption when households are highly indebted.3

Slower Debt Growth but Higher Leverage

  • Even as economic growth slowed precipitously in March, household credit growth picked up noticeably, with both consumer and mortgage credit accelerating on a monthly basis. On the mortgage side, this acceleration could be capturing strong growth in home sales in February, a pickup in refinancing activity as mortgage rates declined, and lastly mortgage deferrals, which would also increase outstanding mortgage balances.
  • The reasons for the acceleration in consumer debt in March are less obvious, particularly given the precipitous decline in retail and auto sales in the second half of the month. One explanation is that it reflects households’ stocking up on supplies ahead of the pandemic. Another is growth in HELOCs, which tend to move with new mortgage credit. Households may have tapped their home equity lines to cover income shortfall due to job losses, particularly before government support programs became operational. Indeed, evidence from the U.S., where lending data is more timely, appears to confirm just that, with home equity loans surging in March before tumbling back down in April (Chart 3).

Chart 3: U.S. Households Tap HELOCs in March

Chart 4: Household Leverage Expected To Increase
  • Despite the rush in borrowing in March, we expect credit to slow noticeably in the second quarter and contract in the third, reflecting the steep drop in home sales and purchases of cars and other durables, as well as broad-based decline in spending on many discretionary items, such as travel. Credit is expected to return to growth in the fourth quarter and beyond, but it will likely trail disposable income, due to more cautious consumer behavior, higher delinquencies and elevated unemployment, which is expected to normalize only toward the second half of end of next year.
  • Despite the slowdown in credit growth, this year’s hit to personal income will cause household leverage – measured as the debt-to-disposable income ratio – to spike (Chart 4). The ratio is expected to gradually decline in 2021 but to remain above its 2019 level. This outlook assumes a moderate increase in delinquency rates and that, thanks to the government’s income support programs, households will be able to avoid a protracted deleveraging cycle, like the one seen in the U.S. in the aftermath of the global financial crisis.

Debt Servicing Costs Are Once Again On A Downward Trend

Chart 5: Debt Servicing Costs To Decline
  • Last year, high debt service costs were an important driver of consumer insolvencies, as the share of household income devoted to debt servicing reached a record high. Households are facing even greater challenges this year, but at least higher interest rates won’t be one of them. Even prior to this crisis, we were expecting the debt service ratio to fall this year. And fall it will. Given the broad decline in market interest rates so far this year, debt servicing costs are expected to ease far more than previously expected, falling in both absolute terms and as a share of income. This will provide an additional, much needed relief to households’ bottom lines (Chart 5).
  • Deferrals on mortgage and consumer credit, and discounted interest rates on consumer credit, will also contribute to lowering debt servicing payments in the near-term but their impact is difficult to quantify precisely. This is especially true when it comes to consumer credit, where deferral terms are less uniform across products and financial institutions. Assistance comes in many forms: for some products, all payments can be deferred, for others, only principal payments can be deferred but not the interest. Generally speaking, deferral terms on consumer loans tend to be shorter in duration (i.e., ranging from two to four months) than deferral terms on mortgages. Among all consumer loan categories, most deferral requests appear to be for auto loans, second only for requests for mortgage deferrals. Thus, they will likely have the largest impact on consumer debt service costs.
  • All in all, after taking into account payment deferrals, the ratio of debt payments to disposable income is expected to decline from nearly 15% at the end of last year to 13.7% by the end of 2021 – the lowest level since the end of 2015.

Household Wealth Takes a Short-term Hit

Chart 6: Household Wealth Takes A Short-term Hit
  • Given the drop in equity prices in the first quarter and the collapse of oil prices, household wealth contracted sharply in the first quarter of this year. In addition to this, the deferral of mortgage payments and lower home prices will also weigh on wealth in the first half of the year, since deferred payments slow home equity accumulation. According to the Canadian Bankers Association, between March and April, there were 720 thousand requests for mortgage deferrals. If this trend continues, the number of total deferrals could reach 900k in June, equivalent to roughly 18% of number of outstanding mortgages in Canada. The average mortgage payment in Canada is around $1,400 and around 40% of this amount goes toward principal repayment. Under these assumptions, mortgage deferrals are estimated to have lowered household wealth by roughly $300 million in the first quarter, and by $1.2 billion in the second.
  • All in all, the drop in household wealth in the first quarter looks to have been the largest since the Global Financial Crisis (Chart 6). The good news is that responding to aggressive central bank easing actions, financial markets have recouped much of their losses since the end of March. While it is far from certain, the worst may be behind us. Meanwhile, home prices have showed resilience so far in the second quarter, as sharp declines in sales have been accompanied by a falling supply of listings on the market. Preliminary data for April point to downward pressure in some markets, such as the GTA, but that largely reflected compositional shifts in the sales.

Wealth Preservation Is Key For Preventing Prolonged Household Deleveraging

  • Whether these trends persist in the coming months is subject to considerable uncertainty. Provided that job markets start a recovery by late spring, demand should bounce off its lows and support modest gains in home prices and household net wealth. If the pandemic-related disruptions prove to be more protracted, housing demand will continue to soften and supply could pick up, through, for example, increased distressed selling by investors.
  • Barring an outsized home price correction, many Canadian households are expected to maintain a significant wealth cushion, which will help them to ride out the current downturn. Over the past decade, Canadian households built significant wealth reserves through asset appreciation. Since the end of 2009, household wealth rose by 84% to $11.7 trillion, with nearly half of it in real estate. As of 2019, average net worth is estimated to be near 800 thousand per household.
  • One fly in the ointment is that wealth distribution is highly unequal, with large differences across age and income groups as well as geographically. For example, based on the Statistics Canada Survey of Financial Security, roughly 8% of Canadians had less than $500 in wealth in 2016. For households in the lowest quintile, this share reaches nearly a quarter. Highly unequal distribution means that the median household wealth a lot lower than the average, around $350 thousand per household.
  • Despite significant distributional issues, it is still true that many Canadian households have large wealth reserves, which could come in handy for riding out the current crisis. Previous Statistics Canada research showed that homeowners (with or without a mortgage) were less likely to be in financial distress and to miss non-mortgage payments. Furthermore, families with higher valued assets relative to their debt were also less likely to experience financial distress, making the debt-to-asset ratio a better predictor of household’s financial distress than the often-cited debt-to-income ratio. This makes sense since assets can be sold or re-mortgaged with proceeds used to pay-off debt or as a short-term income replacement.
  • As far as housing wealth is concerned, Canadian households fare better than the U.S. counterparts. Owner’s equity makes up 74% of the value of real estate among Canadian households, nearly 10 percentage points higher than the same metric south of the border. Only 16% of all active mortgages held by chartered banks in Canada in 2018 had a loan-to-value (LTV) ratio higher than 80%, (meaning they had less than 20% equity stake in their homes), while the vast majority of households have more than that.
  • Owners with less than less than 20% equity in their homes will be most susceptible to a large price correction and also have limited options in terms of accessing home equity to alleviate any financial strain. Ditto for renters, who also have limited wealth or liquidity reserves to tap during the crisis. While data are difficult to come by, anecdotal evidence suggests that homeowners accounted for only about a quarter of consumer insolvencies last year, with non-homeowners making up the rest. The current crisis will likely exacerbate this trend.
  • With courts currently closed and many support programs in place, insolvency filings are, for the most part, on hold, and so it may be some time before we see the true impact of COVID-19 on insolvency rates. But, as payment deferrals and income replacement programs wrap up, consumer insolvencies are likely to increase to recession levels at the end of this year and into the next year.

Bottom Line

  • Highly leveraged Canadian households are facing very uncertain and challenging times as a result of the COVID-19 pandemic. Realizing this, governments, financial institutions and the Bank of Canada have rolled out an unprecedented suite of measures aimed at supporting households and limiting the economic fallout. These measures should help avoid a protracted household deleveraging cycle and preserve the lion’s share of the wealth that households have amassed over the years. Lower interest rates and payment deferrals will also help to keep debt servicing costs more manageable, while a sizeable wealth cushion will offer an additional buffer to tap into to weather the storm. Once the dust settles, households will likely emerge out of this crisis with higher saving rate, but also higher leverage, increasing the downside risk to the longer-term consumer spending outlook.
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