George Osborne has conceded that his £130bn Help-to-Buy lending scheme could artificially inflate the housing market after he asked the Bank of England to monitor the initiative's effect on property prices two years earlier than scheduled.

The chancellor said he wanted the Bank to help him examine how the scheme, which will allow homebuyers from January to borrow their deposit from the government, can be improved.

Under the plan, Osborne has given new powers to the Bank's financial policy committee (FPC) to report annually with the first review next September. The FPC had been due to look at the scheme only after three years.

It is understood the Treasury and the committee will consider capping the scheme below the current £600,000 limit to reduce the possible impact in London.

The U-turn comes a week after the shadow chancellor, Ed Balls, taunted Osborne for lacking an understanding of "basic economics" when the scheme was launched earlier this year.

Balls said the housing market was already overheating in some areas, adding: "Instead of waiting a year, the Bank of England should review the details of the second phase of Help to Buy now before it goes ahead.

"For instance, it's totally ill-thought through for George Osborne to decide that a scheme which should be about helping first-time buyers will allow taxpayer backed mortgages for homes worth up to £600,000."

Rob Wood, UK economist at Berenberg bank, said: "The housing recovery is not just a result of rocketing London prices, so considered in isolation it looks like closing the stable door after the horse has bolted.

"The scheme cannot be reviewed until next September and reducing the £600k cap is unlikely to be a big deal for the bulk of the country outside London."

Fears that Britain's house price boom is already accelerating uncontrollably were fuelled on Friday by figures from Nationwide that showed prices in London at a new high.

The the building society's house price index rose 0.9% month-on-month in September to follow August's 0.7% rise. Nationwide attributed the result mainly to London prices following a double-digit jump in the three months to September.

The Bank of England governor, Mark Carney, in an interview with the Yorkshire Post, reiterated his view that Britain's housing market was seeing a turnaround, but that levels of activity remained only around two-thirds of their longer-term averages for the sector.

"The core of the recovery is not housing, but that said, the prospects and level of activity in housing have turned from low bases and we as the Bank of England need to be vigilant about how those dynamics move in the future," he said.

Carney ruled out a further stimulus to spur growth, saying he could not see a reason at the moment to increase the £375bn of quantitative easing (QE) already injected into the economy.

However, Nationwide warned that affordability could become stretched if demand keeps outstripping supply, although rock-bottom interest rates are helping those with mortgages.

Balls said: "Osborne is still failing to address the fundamental problem of the lowest level of housebuilding since the 1920s. You can't deal with the cost of living crisis without building more homes.

"Rising demand for housing must be matched with rising supply. Unless George Osborne acts now to build more affordable homes, as Labour has urged, then he risks making it even harder for first time buyers to get on the housing ladder. It's no wonder that for millions of families this is no recovery at all."