The EU’s executive body said the scheme was contributing to high levels of mortgage debt.
The commission said the government must: “Deploy appropriate measures to respond to the rapid increases in property prices in areas that account for a substantial share of economic growth in the United Kingdom, particularly London, for example by adjusting the Help to Buy 2 scheme.”
The report acknowledged that the UK has taken measures to boost housing supply, but “it remains low and has fallen short of demand by a considerable margin”.
The commission also recommended for more expensive homes to be taxed by updating the council tax system.
It explained: “At the moment, increasing property values are not translated into higher property taxes as the property value roll has not been updated since 1991 and taxes on higher value property are lower than on lower value property in relative terms due to the regressivity of the current rates and bands within the council tax system."
The European Commission called for action to boost housing supply, yet conceded “a shortgage of supply has long been a structural problem and is likely to extend into the medium term”.
Responding to the report, a Treasury spokesman, said: “The European commission continues to support the UK government's strategy, including its commitment to deficit reduction.
“The government's long-term economic plan is working, delivering economic security for hardworking people.”