New research has revealed average Scottish house prices are set to fall over the next two years.

According to a report by PwC Scotland, prices will decline 1.6% in 2016 and 0.4% in 2017, before rising from 2018 onwards to an average cost of £156,000 by 2020.

In addition, service sector growth will slow but should still remain positive in 2016/17. Construction and capital good manufacturers will suffer from lower investment levels, yet some manufacturing exporters will benefit from the weaker pound.

Overall, the UK's GDP growth is predicted to decelerate to around 1.6% in 2016 and 0.6% in 2017 due to a decline in business investment, particularly from overseas in areas such as commercial property.

Lindsay Gardiner, regional chair at PwC in Scotland, said: "Given what we are seeing here and in the recent Fraser of Allander report, Scotland is skirting very close to recession and while it is going to be a challenging few months, the country should avoid it.

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"But as with the recent Fraser of Allander report, our research is showing that it is the services sector driving growth as manufacturing and construction have peaked for the moment.

"As the UK now has a new cabinet and PM, who has stated she will proceed with Brexit, there is less uncertainty now than there has been for a few weeks and that is a good thing but there is still much uncertainty ahead as we now enter the areas of working out the best deal for the UK with Europe and what potential spin-offs that may mean for Scotland. 

"While our modelling sees the UK avoid recession, it would be prudent of businesses to make plans for recession scenarios, where they can."

Adam Turner, Government and Public Sector assistant director, PwC in Scotland, added: "The picture on housing is sobering and timely as we see the end of 'the right to buy' scheme at the end of this month.

"The only long-term solution for Scotland is to build vastly more affordable, quality housing in in the places where people want to live. This could eventually lead to a situation where earnings growth again starts to outstrip house price growth, sustainably bringing down affordability for those stuck in generation rent.

"Collaboration among developers, social housing providers and government alongside radical and innovative investment measures will be key to solving Scotland – and the UK's – housing market challenge."

(LM/CD)