The Help to Buy scheme will use shared equity and mortgage guarantee programmes to make it easier for those on low incomes or with low deposits to buy a house.
But house building remains low, limiting the supply of houses severely.
“Residential construction remains at a low level and the planning system, including green belt restrictions, continues to be an important constraint on the supply of housing,” said the Commission.
“Government interventions that stimulate housing demand more than supply, including the recently announced Help to Buy scheme could potentially exacerbate this situation by increasing house prices and household debt.”
British household debt already stands at 96 per cent of GDP, well above the European average.
Although some deleveraging has taken place, the EC fears it is far too soon to start pushing debts higher again, and any such move could prove unsustainable.
However the government argues it has already changed planning rules to favour more development and created an equity loan option for those buying new build homes.
In addition the Treasury has committed to giving the Bank of England’s financial policy committee a say over the Help to Buy policy in three years’ time in case a housing bubble does build up.