Scale back Help to Buy scheme or risk house owner debt if interest rates rise, European Commission tells Government

The Government's Help to Buy scheme has been extended until 2020 (Getty)

Urgent action to take the heat out of the property market by scaling back a Government mortgage scheme was backed tonight by the European Commission.

It warned of housebuyers – particularly in the South-East of England – taking on debt they could not afford once interest rates start rising.

Ministers were also urged to take fresh steps to tackle child poverty, reduce youth unemployment and improve the supply of high-quality childcare.

The findings, in a report to each of the EU’s 28 member states, will dismay and irritate the Government which has sought to play down the impact of rapidly-rising house prices on growth.

But the Commission warned of imbalances in the British economy and urged a greater emphasis on capital investment.

It suggested the Government “deploy appropriated measures to respond to the rapid increases in property prices in areas that account for a substantial share of economic growth in the UK, particularly in London”.

The Commission suggested adjustments to Chancellor George Osborne’s Help to Buy 2 scheme, under which the Treasury advances up to 15 per cent of a property’s price, in an effort to “mitigate risks related to high mortgage indebtedness”.

It said: “The risks in the housing sector relate to a continuing structural undersupply of housing; intrinsic supply constraints, particularly in London, and the relatively slow response of supply to increases in demand continues to drive house prices higher.”

The Commission backed renewed efforts to build housing and suggested the “distortions” in the council tax banding system, which dates from the early 1990s, needed to be ironed out.