Bank of England "vigilant" to risks of housing 'bubble' as Governor revises recovery predictions

Carney was speaking as the Bank of England's Monetary Policy Committee (MPC) published its latest inflation report, in which it brought forward its forecast for when it thinks unemployment will fall far enough to trigger a review of the central bank interest rate. The MPC announced in August that it would hold interest rates at the current historic low of 0.5% until unemployment falls to 7%, which it originally predicted would occur in 2016. There is now a two in five chance that the threshold will be reached by the end of 2014, according to the report.

At the press conference held as the report was published, Carney said that it was "not unusual" to see the earliest signs of recovery in consumer spending and the housing market. However, he said that the rate of growth was "quite modest compared to previous recoveries", and should not be a cause for concern.

"We need to put the pick-up in housing activity in perspective," he said. "Activities levels, while they've picked up, are still running at between two thirds and three quarters of historic averages in terms of whether its transactions, or approvals, home building. And so there is some room for that to further pick up and that's the initial phase of this recovery."

"We have a good line of sight to dynamics in the housing market... We are being vigilant, we're spending a lot of time analysing the housing market, analysing potential risks - potential risks - to financial stability. And the FPC either directly, or through other agencies, has access to a broad range of tools that if necessary would be used in a proportionate and graduated fashion," he said.

The Bank Rate of interest, set by the MPC, that the Bank of England charges other banks to purchase central bank money has remained constant at 0.5% since March 2009. The MPC has the power to reduce this rate when it is concerned about inflation; however, when interest rates are almost at zero and cannot be cut any further another option is to use quantitative easing (QE) to increase the quantity of money in circulation.

In August, the MPC announced that it would maintain its current monetary policy until "economic slack has been substantially reduced", with the unemployment rate to be used as the primary measure of economic stability. Once the 7% threshold is reached, the MPC may then decide to increase the Bank Rate or reduce its stock of asset purchases under the QE programme. According to the latest figures from the Office for National Statistics (ONS), the unemployment rate fell to 7.6% between July and September – a fall of 0.2% since the previous quarter and the lowest rate in more than three years.

However, the threshold is not an automatic indication that the Bank of England will raise the Bank Rate. At the press conference, Carney referred to the threshold as "a staging post for assessing policy, not a trigger for an automatic increase". The inflation report also indicated that 1.46 million people were in part time work because they couldn't find a full time job; the highest figure since records began in 1992.

The Government's Help to Buy mortgage guarantee and shared equity loan schemes have fuelled concerns of another housing bubble, like the one that led to the initial economic crash in 2008. In September, the Chancellor announced that the FPC would be able to scrutinise the scheme once it had been running for a year, instead of only at the end of its three-year life. This week the Treasury Committee wrote to the FPC, asking it to clarify the nature of its role in relation to the scheme.

Projects expert Chris Hallam of Pinsent Masons, the law firm behind Out-Law.com, said that by helping those with little deposit or equity onto the property ladder, the schemes were themselves fuelling house price rises. This was the reason that many commentators were concerned about the link between these schemes and signs of economic recovery, he said.

"When base rates start to rise, so will commercial/mortgage interest rates," he said. "This will mean repayments will increase, as will repossessions when people are unable to afford these repayments – real income is currently lower than 10 years ago due to low wage increases, high inflation and high consumer prices."

"Repossessions slow the market and house sales turnover, which will slow or reverse house price rises. Those with low deposits could then fall into negative equity, further slowing the market as they are unable to move," he said.