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LONDON (Reuters) - Britain's housing recovery does not require any action from regulators but will need to be watched closely, the Bank of England's Financial Policy Committee said on Wednesday.
The FPC, which has been tasked with spotting risks to the economy from the financial system, also singled out hedge funds for an examination of their vulnerability to rises in long-term interest rates.
The FPC said it made no new recommendations at its most recent meeting on September 18.
The watchdog said it was keeping a close eye on Britain's housing market which has picked up speed and raised some concerns from some external economists about the risks of a new bubble in property prices.
The FPC said the housing recovery "appeared to have gained momentum and to be broadening" but activity and loan-to-value ratios on new mortgages were below historic averages.
Debts costs were low and house prices compared with earnings were at their level of a decade ago.
"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.
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.
The housing recovery has been helped by government and Bank of England measures to free up mortgage lending. A new phase of the government's Help to Buy program is due to be launched in January.
Bank of England 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 BoE to take measures to slow mortgage lending if house price growth exceeds 5 percent a year.
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.
Reporting by Huw Jones and William Schomberg