Urban fantasy: Interior designer Abigail Ahern has brought a touch of 'Alice in Wonderland' to her London home

Within an unassuming Victorian house on a quiet London street, Abigail Ahern's fox terrier, Molly, is sprawled across the stone living-room floor. On the ground beside her stands a sculpture of a monster's foot, almost as big as she is. At the other end of the room, perched on a 15-foot horizontal oak beam lodged at chest height between the two main walls, is a fibreglass elf, the size of a child. The space between them is a cacophony of furnishings and memorabilia – all different colours, shapes and textures – set against high, inky-grey walls.

"My inspiration is Alice in Wonderland," Ahern explains from her position at a small round table, over which looms a huge purple, velvet anglepoise lamp."I like to play with scale, to insert things in a space which they are clearly too big for. It is the fact that most of the objects and textiles in the house shouldn't theoretically be placed together that makes it work," she says. Yet despite the busyness of the rooms, where injections of pillar-box red, fuchsia pink and vivid yellow spring from paintings, sculptures and wallpapers, Ahern – who runs Atelier Ahern, a quirky interiors boutique in Islington, north London – has achieved an impressive sense of tranquillity, too.

Over the lowest two floors of her four-storey house, she has replaced the original back wall with a huge stretch of glass. There are no curtains or blinds, so that Ahern and her husband Graham have a constant, uninterrupted view of the garden from the living room and the kitchen. "This was the first thing we did when we moved in," she says. "Graham and I lived in different parts of the States for years, and fell in love with those big glass houses overlooking the Great Lakes while we were there." Happily, the architecture has translated well. The view of the horizon beyond the garden is entirely unspoilt by tower blocks or television aerials, which makes it feel like you could be anywhere – except maybe for where you actually are, just off a busy main road next to Dalston Junction.

A carefully positioned row of fig trees at the end of the garden blocks out anything going on beyond these four walls. On one side is a bed of jasmine and honeysuckle, and bamboo plants run the length of the other. "I really wanted something scented and easy to maintain, so this combination worked perfectly," says Ahern. "It also helps create a Zen-like atmosphere." The simple lawn is punctuated by the occasional signature Ahern touch – a statue of a Dalmatian, a vivid pink plastic table. A classic Philippe Starck chair, positioned in front of a shabby garden table, is where Abigail spends a lot of her time researching designs for her boutique, which began five years ago in a tiny shop in east London, before moving to Islington in 2006. It's the juxtaposition of old and new, designer and makeshift, that Ahern favours. When she wants something more solitary, there's a hanging pod chair in a secret alcove hidden behind thick foliage, which she describes as "a haven of serenity".

Back inside the house, the ground floor, paved in cool grey stone, feels in many ways like an extension of the garden. It's littered with vivid paintings, some scavenged at flea markets and art fairs – Ahern cites Port Du Vin in Paris and graduate shows as some of her favourite roaming grounds – and a series of whimsical Bernard Pie pieces, displayed in ornate 17th-century frames, each a vivid Pop Art canvas.

The key to making this work, Ahern reveals, is to add colour only when working on a neutral palette; to this effect, almost every room in the house has deep grey walls. Each looks a slightly different shade because of the varying degrees of light. "Sometimes it can appear like an inky blue, and at other times it can acquire a violet hue," she says. One striking feature is a bright pillar-box red mirror, which Ahern explains is exemplary of her frugal approach. "I took a cheap frame from a junk shop to the local Ford car sprayers, who covered it for me. The paint gives an amazing lacquer effect; the only problem is that you can only choose from a limited colour scheme, so it's always quite a vibrant shade."

Another top tip, she adds, is to find rusted signs, bought at a small expense, and to display them backwards on the wall. "The huge piece above the fireplace in the living room is an old Michelin tyres ad," she says. "The rusting looks so amazing, like a fabulous piece of art, and these can be found at any old flea market."

When it comes to thrifty household renovations, Ahern knows her stuff. She has just written a book on the subject, which gives pointers on how to create a stylish home on a budget. "When Graham and I first bought this house, 10 years ago, we spent the majority of our money on structural renovation, so there was nothing left for the bits you want to splash out on. I had no option left but to get creative," she explains.

Even her kitchen units are embellished Ikea pieces, though you wouldn't know it to look at them. "What every woman should know," she concludes, "is that it is totally possible to couple low-cost ideas with high style. If you use the right tricks of light, and careful positioning, even the pokiest home can be made to look much more glamorous than it really is."

A Girls Guide to Decorating (Quadrille, £16.99) is available now. To order at a special price, including p&p, call Independent Books Direct on 08700 798 897