2009-14: The Goods and Services Tax (GST) and Bank Mortgage Costs: Empirical Evidence (Working paper)

Abstract

In July 2000, Australia implemented a new tax system of goods and services tax (GST). Since then Australia has experienced significant rises in mortgage costs and decline in housing affordability. Although prior research has attempted to investigate the impact of the GST on the general price level, a central question of what extent to which the GST has impacted on mortgage costs remains unanswered. Using unique data of all banks in Australia (covering 36 months), this paper empirically examines and quantitatively measures the changes of mortgage costs in the pre- and post-GST periods. Results of t-tests and regressions provide robust evidence that the banks significantly increased their mortgage charges in the post-GST periods. For example, the increase is found to be, on average, 52.4 basis points. It is also found that the rise in mortgage costs is not a one-off impact. This study is the first one internationally that examines the impact of the GST on bank mortgage costs and the findings should have important financial, economic and policy implications.