Wandsworth LBC's policy of offering vacant properties for sale rather than for rent was introduced in 1983 by Paul Beresford, now environment minister.
The auditors' report rejected claims that the council had introduced its policy to attract Conservative voters into the area.
The council 'misdirected itself in law' when it assumed that it was entitled to strike a balance between its desire to increase home ownership and its duties to the homeless, the report said.
The report also criticised the failure to consider whether the properties would be mortgageable. Many were in high-rise properties and buyers found them hard to sell on.
Current council leader Edward Lister, said the report set the record straight. Wandsworth had always acted reasonably and had paid proper regard to its legal powers and duties. He told the paper:
'The council's policy of encouraging home ownership has been a great success.
'It has helped to make Wandsworth estates attractive places to live.'