LONDON The Bank of England said on Wednesday there was no immediate danger of a property bubble in Britain but that it was keeping a watchful eye out.
It also said it wanted more study on how vulnerable hedge funds that rely on borrowing would be to future interest rate rises.
The central bank's Financial Policy Committee (FPC) said Britain's housing recovery "appeared to have gained momentum and to be broadening" but was under control, based on gauges such as level of activity, debt costs and prices compared with incomes.
"In view of that, the Committee judged that it should closely monitor developments in the housing market and banks' underwriting standards," it said in a statement after its Sept 18 meeting. "The Committee would be vigilant to potential emerging vulnerabilities."
If any action was needed, it would be "proportionate to the risks and consistent with a graduated response."
House prices in Britain as a whole rose 3.3 percent in the 12 months to July but jumped nearly 10 percent in London, official data showed last week.
This has triggered some concern that BoE and government lending incentives are creating a housing bubble.
Stephen Lewis, chief economist at Monument Securities said the FPC - which is tasked with spotting risks to the economy from the financial system - was right to hold off for now. "It's probably the right thing at the moment. There is a lot of uncertainty at present about the housing market."
The housing recovery has been helped by government and Bank measures to free up mortgage lending. A new phase of the government's Help to Buy program is to be launched in January.
Governor Mark Carney and finance minister George Osborne have shown no concern about the prospect of a housing price bubble, pointing to levels of activity in the property market that are below their pre-crisis peak.
But earlier this month, a group representing British property surveyors called on the Bank to take measures to slow mortgage lending if national house price growth exceeds 5 percent a year.
Ed Miliband, leader of Britain's Labour opposition party, said this week that if he wins election in 2015 he would more than double the number of new homes built annually to 200,000 by 2020 to ease a shortage that has helped to push up prices.
FOCUS ON HEDGE FUNDS
In June, the BoE ordered an investigation into the vulnerability of Britain's financial institutions and borrowers to higher interest rates when central banks around the world start to wean their economies off massive stimulus.
The FPC said in its statement on Wednesday that a moderate rise in long-term interest rates did not pose an immediate threat to major banks and insurance companies and so far "had not led to dislocations in market functioning or significant impact on financial institutions."
However, levels of leverage within hedge funds, which could make them vulnerable to a sharp rise in borrowing costs, "needed to be looked at more closely," the statement said.
The Financial Conduct Authority, which is represented on FPC, said it asked a number of hedge funds during the summer about their preparedness for changes in interest rates following the June FPC meeting and as part of routine supervisory work.
The FPC's wider review of rate hikes would continue by looking at what impact "more significant stresses" would have and how any impact would ripple through the financial system.
The FPC said it will publish on October 1 a discussion paper on the design of a new framework for stress testing banks.
(Editing by Jeremy Gaunt)