THE Scottish housing market is set to defy the credit crunch and will continue to outperform the rest of the UK, according to a new report.

High rates of employment in the financial sector and sustained demand among young professionals for mid-priced city centre homes should mean that Scotland will escape “relatively unscathed” from the turbulence in the global financial markets, according to the study by estate agents Knight Frank.

The firm's analysis of house prices over the past year has revealed that they rose by 13% in Scotland, the biggest increase outside Greater London. Across the UK, the average price rise was 5.2%. The cost of new homes in Scotland rose by 20%.

While the credit crunch caused by subprime lending in America will dampen the market, the report predicts that prices in Scotland will continue to rise this year, bucking the trend across the rest of the UK.

Knight Frank's Scottish residential review predicts average house price inflation of 1% in Scotland, while prices elsewhere are expected to fall by an average of 3%.

“In Scotland the market is not as volatile as the rest of the UK, it doesn't have the same boom and bust culture,” said Liam Bailey, Knight Frank's head of residential research, who compiled the report.

“You don't tend to get the kind of speculation you get in the rest of the UK and that makes Scotland a healthier market.

“At best price growth will be 2-3% for this year and sales volumes will be down about 20%, but it's not a crisis.”

Bailey said a number of factors would protect the Scottish housing market from the downturn predicted for the rest of the UK.

These include the greater availability of social housing, fewer owner-occupiers, the strength of the financial sector - where the number of people employed directly has increased by over a third over the past seven years to more than 113,000 - and higher levels of employment.

The proportion of people of working age in employment rose in Scotland to 76.5% last year, 2% above the UK rate.

Gwilym Price, professor of urban economics and social statistics at Glasgow University and chairman of the Scottish Housing Economics and Finance Network, is in agreement with the report's findings: “The credit crunch is very new territory and difficult to anticipate but I don't think we will see a house price crash in Scotland,” he said.

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