HBOS, yesterday unveiled the gloomiest forecast for house prices this year as it predicted a fall of up to 9 per cent and said values could fall faster in an uncertain market.
The forecast is a big change from the figure of about 5 per cent that HBOS, which owns Halifax, made in April. Britain's biggest mortgage lender warned that falling prices would increase mortgage arrears this year and signalled cautious lending across the board as the economy slows.
Andy Hornby, HBOS's chief executive, said: "It [prices] could fall faster than 9 per cent; it could fall less. The last two months have been particularly thin in terms of volumes of housing transactions. Nine per cent is a reasonable forecast for the year."
Mortgage bad debts rose by £719m between December and May, with problems concentrated in buy-to-let and self-certified loans. Arrears in these specialist mortgages jumped to 3.09 per cent of total mortgages from 2.59 per cent in five months.
Mr Hornby said the increase in arrears was in line with the bank's expectations and that the specialist mortgages were performing better than in 2005. He tried to reassure analysts that the bank's £4.2bn of lending and investment in the troubled housebuilding sector was focused on sectors such as retirement homes and affluent developments rather than high-volume operators. The bank also announced an extra £58m negative value adjustment to its treasury assets, taking the write-down to £1.03bn. Mr Hornby said HBOS remained happy to hold the assets to maturity.
HBOS issued its trading statement as it published the prospectus for its £4bn rights issue, which will cost it £160m. Mr Hornby said the bank's underwriters, Dresdner Kleinwort and Morgan Stanley, had scrutinised the accounts and were fully behind the rights issue. HBOS shares were the biggest fallers in the FTSE 100, dropping 7 per cent and dragging other bank stocks down with it.
The credit crunch has forced many mortgage lenders to cut back their activities. The Council of Mortgage Lenders yesterday predicted weak house-purchase activity in the next few months after gross mortgage lending in May fell 2 per cent on the month to £25.5bn, down 19 per cent from the a year earlier.
Mr Hornby said improving profit margins would underpin a "resilient" performance by the bank this year. The fall in the key net interest margin has slowed and the margin could increase next year after years of being squeezed amid intense competition on mortgages. "Margin performance is better than we had anticipated, but the focus will be on the deterioration in asset quality trends," KBW analysts said. "We see little of surprise in this statement and remain concerned about asset quality evolution."
Standard & Poor's changed its outlook on HBOS to negative from stable but maintained the bank's credit ratings.