grown rapidly over recent years and are now an important feature of the australian mortgage market ( graph 5 ). funds held in these accounts are ‘ offset ’ against the loan balance, reducing the interest payable on the loan. in that way they are similar to a principal repayment. but, unlike the scheduled principal repayment, offset ( and redraw ) balances can be moved in and out freely by the borrower. 6 / 13 bis central bankers'speeches part of the strong growth in offset balances up to 2015 appears to have been related to the rise in the share of interest - only loans, with the two being offered as a package. interestingly, we saw a significant slowing in growth in offset balances around the same time as growth in interest - only housing loans started to decline. graph 6 highlights how the distribution of current lvrs is altered if we deduct funds held in offset accounts from the balance owing. this suggests that for owner - occupier loans, interest - only borrowers are behaving somewhat like those with principal - and - interest loans. that is, many of those borrowers have built up significant balances in offset accounts. if needed in times of financial stress – such as a period of unemployment – borrowers could use those balances to service their mortgages. 7 / 13 bis central bankers'speeches however, i would caution against any suggestion that this similarity regarding the build - up of financial buffers means that the tightening of lending standards for interest - only loans was not warranted – far from it. what matters when it comes to financial stability is not what the average borrowers are doing, but what the more marginal borrowers are doing. there are two important points to make on this issue. first, for investor loans, even after accounting for offset balances, there is still a noticeable share of loans with current lvrs of between 75 and 80 per cent. and for both investor and owneroccupier loans, adjusting for offset balances leads to only a small change in the share of loans with current lvrs greater than 80 per cent. this suggests that borrowers with high current lvrs have limited repayment buffers. the second point is that more marginal borrowers are now more likely to take on a principal - andinterest loan than in the past. one reason is that there is a premium on the interest rates charged on an interest - only loan ( for any given borrow

, australian households borrowed at a rapid pace for the purposes of owning dwellings, either to occupy or to let out. the median price of dwellings in australia rose in parallel, by 120 to 150 per cent, depending on the price measure used. 3 the peak in prices nationally was about two years ago now, in the last quarter of 2003. since then, median prices have risen further in some regions, but have fallen a little in sydney and melbourne, to give a flat performance for the national median price. this has been associated with a slowing in the pace of borrowing, particularly on the part of investors, though the rate of growth of outstanding credit remains, if anything, somewhat higher than one would expect to be a sustainable pace in the long run. this has been associated with a waning of an apparent wealth effect which had been in operation, where consumer spending rose faster than income for a number of years and household saving rates declined. 4 some estimates suggest that, in net terms, households actually withdrew some of the accumulated equity in the dwelling stock during the early years of this decade, a small proportion of which was probably used for consumption purposes. ( the rest appears to have been placed into financial assets. ) but since mid 2004, consumption spending has been proceeding in a more moderate fashion. at 3 per cent growth over the past year, it has been rising more in line with income. that is not a particularly weak outcome in any absolute sense, but it is a quite notable slowing from the earlier 6 per cent pace. it is quite fortuitous, of course, that this adjustment has coincided with the large income gains from the terms of trade. a scenario where the housing boom had gone on for two or three more years and then turned down at the same time as the terms of trade began a cyclical fall would have been much less attractive. petrol prices i noted earlier that worldwide, rising energy prices over several years did not seem to have pushed up inflation much, so far, partly because there seemed to have been moderation in other prices. this same point can be nicely illustrated by australia's consumer price index. the chart below shows the change in the cpi, at the sub - group level, 5 over the past two years. the figures are up to june 2005 ; new data for the september quarter will be published the week after next. in tasmania, house prices rose by less over the same period though they have continued to rise of late. tasmania still enjoys relatively lower costs of