The goods and services tax and mortgage costs of Australian building societies

Abstract

Australia has experienced significant rises in mortgage costs and sharp declines in housing affordability since it implemented a new tax system of Goods and Services Tax (GST) in July 2000. Prior research has attempted to examine the influence of the GST on general price levels, but little research effort has been directed to investigate the impact of the GST on mortgage costs. Using proprietary data of major building societies in Australia for 36 months, this paper examines the changes of mortgage yield spreads in the pre- and post- GST periods for building societies. Results suggest that the lenders significantly increased their mortgage charges in the post-GST periods. For example, the increase is found to be, on average, 45.4 basis points. The paper also documents that the rise in mortgage yield spreads is not a one-off impact. The findings are consistent with Huang and Liu (2009) on Australian banks.