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Bank of England 'vigilant' on UK house prices

London
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London

The Bank of England will keep a close eye on the rising cost of houses in the country and says it can choose from a range of policy tools to employ if a price surge posed a risk to the financial system.

A number of recent housing indexes have suggested that prices are approaching pre-crisis highs, with London showing a particular resurgence. Nationwide confirmed in August that an average home was now worth £170,825 ($260,098), the highest since June 2008 when the average was £172,415. Meanwhile, property website Rightmove has predicted that prices are set to increase by 6 percent this year, from an initial estimate of 2 percent at the start of the year.

The figures have given rise to fears that a housing bubble is brewing.

(Read More: UK housing recovery spurs 'bubble' warnings)

"The committee would be vigilant to potential emerging vulnerabilities," the Bank said in a statement on Wednesday morning, after a meeting by the Financial Policy Committee.

The central bank noted that mortgage approvals in July were 30 percent higher than a year earlier. Average house prices in August were 5 percent higher and had risen even more in some parts of the country, particularly London.

It said that activity in the housing market and loan-to-value ratios on new mortgage lending were still below historical averages, but added that that wouldn't stop it from closely monitoring developments in the housing market and banks' underwriting standards.

"The committee noted that if risks to the stability of the financial system were to emerge from the housing market, both it and the microprudential regulators had a range of tools available to address those risks," it said. It could give guidance on underwriting standards, capital requirements and recommendations on affordability tests.

(Read More: Carney warns of UK 'false dawn', overheating housing market)

The words echo those of governor Mark Carney who, speaking before a parliamentary committee on September 12, said that lenders could raise capital requirements for mortgage lending to prevent overheating, as well as limit prospective house buyers' borrowing in line with their income.

Carney acknowledged the sudden rise in prices after the government launched measures to further stimulate demand, and said the Bank might look at more intensive supervision of the mortgage lending market. "We do need to be vigilant," he told policymakers.

(Read More: UK IPOs surge in best post-crisis performance)

The Bank of England's current quantitative easing (QE) program has run alongside a Funding for Lending Scheme, providing state-backed assistance for first-time buyers. Additionally, U.K. Chancellor of the Exchequer George Osborne announced in his latest budget a £5.4 billion "Help to Buy" mortgage scheme aimed at helping citizens with a limited deposit to purchase property.

Critics of the latter measure have included both The International Monetary Fund and former Bank of England Governor Mervyn King who called it "too close for comfort" to the U.S. mortgage guarantee schemes that some blame for triggering the financial crisis.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

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