High house prices and mortgage debt are destabilising the UK economy, a European Commission report warned today.
In a report on the performance of all EU member states under increased monitoring powers in the wake of the economic crisis, the Commission highlights "high levels of household debt" and the "insufficient and rigid" housing supply in the UK.
The report says: "The high levels of household debt accumulated over the past decade are linked closely to high house prices and represent an important imbalance in the UK economy."
It said household debt has been rising steadily for the past ten years, and highly indebted households are "vulnerable to rises in interest rates or in unemployment, with potentially destabilising effects on the economy at large".
The report warns: "Household indebtedness may be further exacerbated if house prices increase again, especially in relation to disposable income.
"While there are currently few indications that housing demand or interest rates would surge in the near future, the insufficient and rigid supply of housing in the UK exposes the country to higher and volatile house prices."
The report says the "noticeable under performance" of the UK regarding external competitiveness and export developments deserves attention - "although its potential macroeconomic risks appear less pressing than those arising from internal developments".
Labour Treasury spokeswoman Rachel Reeves said: "This is just the latest international organisation to warn that the Conservative-led Government urgently needs a plan for jobs and growth.
"Bringing forward infrastructure investment now would help to boost an economy that's been pushed into a double-dip recession by this Government's mistakes. It's what the IMF called for last week and what Labour has been demanding in its five-point jobs plan.
"Without urgent action to get our economy moving again, the Government will cause long-term damage and won't succeed in getting the deficit down.
"After this week's U-turns, and with Britain now in recession, David Cameron and George Osborne need to rethink their failing economic policies."
A Treasury spokesman later welcomed a Commission recommendation that the UK should "fully implement the budgetary strategy for the financial year 2012/13 and reinforce the budgetary strategy for the financial year 2013/14 and beyond".
The spokesman commented: "This shows their (the Commission's) backing for the UK's plans to deal with its debts in line with the IMF and OECD."
The Commission economic recommendations for the UK also included addressing "the destabilising impact of high and volatile house prices and high household debt by implementing a comprehensive housing reform programme to increase housing supply and alleviate problems of affordability and the need for state subsidy of housing".
The report urged the Government to "continue to improve the employability of young people", as well as "further improve the availability of bank and non-bank financing to the private sector, in particular to SMEs", and to boost the country's transport and energy networks.