HOUSE prices will plunge by up to a fifth over this year and next in the face of spiralling energy prices and tough economic conditions, the Scottish banking giant HBOS warned yesterday.
The Edinburgh institution said it had been hit by a 36 per cent leap in bad debts as customers struggled with repayments – and it had been forced to drastically cut its share of the new mortgage market.
Announcing a profits drop of more than half
, which it attributed to the credit crunch, the bank admitted it expected no respite in a "worsening economic climate" and said it could be forced to sell more assets.
And, in an attempt to offset higher funding costs in crippled wholesale money markets, it plans to "reprice" about a third of its mortgage portfolio this year, on top of recent increases.
The warnings came as Nationwide announced the biggest annual drop in house price value it had ever recorded – 8.1 per cent in the past year.
Fionnuala Earley, the Nationwide's chief economist, said the building society had seen nine successive months of house price falls that appeared set to continue.
She said the average price of a home was £169,316 – nearly £15,000 down on a year ago – and "the risk of an economic recession in the UK is now clearly rising".
The plunge means that millions of homeowners have seen the value of their property lose £300 a week since summer 2007. And Howard Archer, chief UK and European economist at Global Insight, said it was "odds-on that house prices will continue to head rapidly south."
He expects prices to fall by 15 per cent this year, with further falls of 12 per cent in 2009, to leave the average home costing £136,196.
The predictions compound the growing economic gloom of separate figures, earlier this week, which showed consumer confidence had plunged to its lowest level since records began. The bad news will intensify the pressure on Gordon Brown, the Prime Minister, amid concern that the downturn could become a full-blown recession.
Andy Hornby, the chief executive of HBOS, insisted the bank would weather the financial storm and had taken measures to ensure it was "well positioned to operate in the more challenging economic environment".
The bank held a £4billion rights issue earlier this month to shore up its balance sheet but underwriters were left with the majority of the shares after the price dropped to a record low.
Mr Hornby said: "The reduced availability of credit and a slowing housing market are now part of a wider economic slowdown.
"We expect UK GDP growth to remain positive in 2008 but with a risk to the downside in 2009.
"Consensus forecasts, for the decline in house prices, is now in the range of 15 to 20 per cent over 2008 and 2009 combined.
His bank reported underlying interim pre-tax profits down 51 per cent, a drop from £2.96 billion last year to £1.45 billion.
Its share of new mortgage lending fell from 22 per cent for the final six months of last year to 7 per cent after it pledged to put margins before volumes.
Earlier this week, it emerged that Abbey had overtaken HBOS as the largest lender of new mortgages, with a half-year market share of 26 per cent, while Cheltenham & Gloucester, owned by Lloyds TSB, now ranks second with a 24 per cent share.
