European Commission calls on the UK to reform housing market

The report called on the UK to continue efforts to increase the supply of housing and to deploy appropriate measures to respond to the rapid increases in property prices, particularly in London and the south east. It recommended that the Help to Buy loan guarantee scheme should be adjusted and risks related to high mortgage indebtedness should be mitigated.

The report said that reforms to the taxation of land and property should be considered to alleviate distortions in the housing market. It said that increasing property values are not translated into higher property taxes because of the regressive current rates and bands within the council tax system.

"The UK has taken both demand and supply side measures in the area of housing. Although the supply of new properties has risen, it remains low and has fallen short of demand by a considerable margin," the report said. "Action is needed to further boost the supply of houses by creating appropriate incentives to raise supply at the local level," it said.

The report was published as part of a series of economic policy recommendations by the European Commission to individual Member States to strengthen economic recovery.

"This is about helping member states firmly out of the crisis and back to growth, with the country-specific recommendations acting as a compass showing the direction," said European Commission president José Manuel Barroso in a statement.

"If politicians show leadership and summon the political will to see reform through, even if it is unpopular, we can deliver a stronger recovery and a better standard of living for everyone," Baroso said.

Rebecca Warren, planning expert at Pinsent Masons, the law firm behind Out-Law.com said it was unlikely the recommended tax reform would lead to change.

“The suggestion to review the council tax band system to increase tax revenues is nothing new and has been debated over a number of years. It has been discounted by successive governments for a variety of reasons," Warren said.

"A mansion house tax has been mooted and so have other 'Robin Hood' options. Ultimately it is the age old problem of supply and demand and so it is unlikely these calls by the Commission will be catalyst for any significant changes,“ she said.