The European Commission has called on the UK to raise taxes on higher value properties, build more houses and adjust the Help to Buy scheme.
The commission said council tax bands should be revalued, which would put up bills for some people.
Each year the commission offers member states advice intended to help ensure long-term growth.
The Treasury said that as one of the fastest growing economies, would listen to the commission with interest.
In far-reaching recommendations the European Union's executive body also said the UK should prioritise capital spending, affordable childcare, bank lending to small firms and making the planning system more predictable.
'Price increases'On housing, the commission urged ministers to "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".
The three-year Help to Buy mortgage guarantee scheme, announced in the 2013 Budget, is designed to make it easier for people to get on the housing market.
Some housing experts have expressed concerns the scheme has contributed to double-digit prices rises seen in London over the past year, pushing properties further out of the reach of first-time buyers.
But figures released last week showed that 94% of the 7,313 home purchases funded through Help To Buy so far were outside London while more than 80% of those assisted were first-time buyers.
The commission said: "Action is needed to further boost the supply of houses - by creating appropriate incentives to raise supply at the local level.
"The authorities should continue to monitor house prices and mortgage indebtedness and stand ready to deploy appropriate measures, including adjusting the Help to Buy 2 (loan guarantee) scheme, if deemed necessary."
The Commission also said reforms to the taxation of land and property should be considered "to alleviate distortions in the housing market".
"At the moment, increasing property values are not translated into higher property taxes as the property value roll has not been updated since 1991," it said.
"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."
'Regressive'It also recommended that "distortions in property taxation" could be addressed by "regularly updating the valuation of property and reduce the regressivity of the band and rates within the council tax system".
The commission praised the UK for extending childcare provision, making benefits changes and providing more incentives to work but said more should be done on apprenticeships and skills.
"With these recommendations, the commission is pointing the way forward," Commission President Jose Manuel Barroso said.
"We believe that member states must now play their part in seeing these reforms through, even if we know that sometimes they are politically unpopular," he said.
The BBC News Channel's chief political correspondent Norman Smith said David Cameron and George Osborne were likely to be "quietly fuming" at the wide-ranging critique of government policies at a time ministers were presenting the economic recovery as a success story.
Aside from the idea that the UK must build more houses, which the government accepts, the rest of the advice was likely "to end up in the bin", he added.
Norman Smith said many Tory backbenchers were already "spoiling for a fight" over Europe and this was likely to make matters worse at a time when the UK was involved in a stand-off over who should lead the Commission.
'Aspirational'Douglas Carswell, the MP for Clacton, told The Times that an unelected group of officials could not tell the UK how to spend its money while colleague Dominic Raab said the chancellor should treat the Commission's advice as "spam when it arrives in his inbox".
Eurosceptic body Business for Britain said the European Commission should "spend more time worrying about how it makes the EU more competitive rather than suggesting how to hamstring the UK economy with high taxes".
A Treasury spokesman said: "Figures last week showed Help to Buy has helped thousands of first time buyers on steady incomes buy properties and finally realise the dream of home ownership.
"It's an aspirational policy that will remain a key part of our economic plan."
He added: "We are the first to say we must be vigilant and not repeat the mistakes of the past which is why we specifically gave the Bank of England powers to intervene in the housing market.
"They should not hesitate to use them if they see fit."
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