Britain’s 15-year economic expansion is built on unsustainable foundations that are becoming more exposed as homeowners’ finances are stretched ever tighter, two reports have claimed.

Policy Exchange, the centre-right think-tank, says today that the UK’s unprecedented period of consistent growth and low inflation is “more mirage than miracle”. It argues that Britain’s record is worse than its rivals’ and is too reliant on erosion of savings and on rises in debt and immigration.

The report comes as Alliance & Leicester, the mortgage bank, gives warning of deterioration in many households’ finances. Savings rates of mortgage-holders have deteriorated far more quickly than have those of people without mortgages, it said.

Oliver Marc Hartwich, the Policy Exchange chief economist and lead author of the report, said: “Other European economies have recently embarked on a process of economic modernisation. However, the UK’s tax, spending and regulation policies have gone in the other direction. We need to find more sustainable foundations for our future economic prosperity than house prices and debt.”

The report, co-authored by Holger Schmieding, a Bank of America economist, notes risky bets supporting UK economic health since the early 1990s.

Although house prices have more than doubled over the past 15 years, the report does not forecast a crash. However, “house price inflation is unlikely to continue much longer at recent rates,” it argues, adding: “The period of declining real interest rates, which made expensive houses affordable, is over. The current crisis in the US housing market illustrates the risks.”

Rampant house price inflation has encouraged people to wipe out their savings and invest what they can in property, the report warns.

In 1992 households saved 8.3 per cent of their disposable incomes, but by 2004 this saving rate had turned negative as the high cost of homes encouraged more and more borrowing. Personal debt rose by £777 billion over the 14 years to June 2007, to a total of £1,343 billion.

Borrowing against homes’ value is not a sustainable way to finance consumer demand, the report argues, because it relies on house prices rising indefinitely. “The amount of private debt leaves us vulnerable to future house price developments,” it says.

The vast increase in personal debt is matched by that of the public sector, with the national debt more than doubling since 1992. “Just as private households have been living beyond their means, so has the state,” the economists say. “In the event of an economic downturn, the UK now has little leeway for a financial stimulus.”

Although the economy grew 49 per cent in real terms between 1992 and 2006, that was less than in any other English-speaking country, the report says. Moreover inward migration has flattered the figures: GDP per capita only rose 41.9 per cent over the period.

Policy Exchange, a think-tank with close links to David Cameron, calls for a new approach, in which business regulation and the state’s size are cut. It also calls for better infrastructure.

Alliance & Leicester’s report paints a similar picture of homeowners responding to the five interest rate rises since August 2006 by cutting back on saving and by borrowing less. It finds that those with mortgages are increasingly lagging behind the average. In January 2006, the average sum of savings of a mortgaged household was 64 per cent of that of homes with no mortgage to pay, but it is now down to 48 per cent.

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