Government claims that 140,000 new homes will be built in a decade as a result of a new funding scheme were based on bad maths and poor research, according to a public spending watchdog.
In a blistering assessment of the New Homes Bonus, the National Audit Office also said there was little evidence the new system was working and warned that some of the most deprived areas could end up losing significant amounts of funding.
Its investigation found that the reforms, aimed at incentivising house building, had rewarded councils for developments that were already in the pipeline.
The report also heaped criticism on the Department for Communities and Local Government, including for failing to adequately monitor the £1.3 billion being paid to councils.
A planned review of the bonus must be carried out "urgently", the NAO said.
Amyas Morse, head of the National Audit Office, said: "Some local authorities could face significant cuts in their funding as a result of the New Homes Bonus scheme. While it is too early for the scheme to have had a discernible impact on the number of new homes, the signs are not encouraging.
"The department must now urgently carry out its proposed review of the scheme to ensure that it successfully encourages the construction of much-needed new homes."
The New Homes Bonus is paid to English local authorities for every home - new build or empty house returned to use - added to their council tax register after demolitions have been deducted.
Housing minister Mark Prisk said: "This report is unduly negative and unfair. Housing supply is up and planning approvals are up - we are getting Britain building.
"The reality is that the New Homes Bonus has already rewarded councils for the delivery of 450,000 homes and we are confident that it has the potential to increase supply by at least 100,000 homes over 10 years."