The banking group, which owns the Halifax, had earlier predicted that the decline would be less severe.

In a trading update, HBOS said the housing market remained “subdued” and the number of transactions this year would be down by 45% on 2007’s level.

Its comments came ahead the launch of its rights issue through which it is aiming to raise £4bn from shareholders.

In February, HBOS said house prices would be “flat” in 2008. Then, in April, the Halifax house price survey predicted “a mid single digit percentage decline”.

Figures last week from the Nationwide building society suggested that house prices were down by 4.7% in the first five months of the year, and by 3.2% in the past three months.

Arrears

HBOS said that falling house prices meant it would have to write off more of its loan book as potential bad debts – and said it was also seeing a rise in mortgage arrears levels.

The proportion of its mortgages which are in arrears has risen from 1.3% at the end of December 2007 to 1.43% at the end of May.

Arrears in its mainstream home loans have gone up in that time from 1.16% to 1.22%.

But the situation is much worse with self-certified mortgages, which amount to 13% of all the bank’s home loans.

Borrowers did not have to present any real evidence of their ability to repay before they were granted these loans, and arrears among them have risen from 2.51% to 3.11%.

The bank pointed out that the profitability of its mortgage lending should improve next year.

One-third of its current stock of home loans will be charged at higher interest rates in the course of 2008, because of new customers being offered more expensive deals then before, and existing customers also switching to loans at higher rates once their current fixed or introductory rates have expired.

‘Global dislocation’

Also in its trading update, the bank added that write-downs linked to the credit crunch had risen by £58m to £1.03bn since the end of March.

It said that it was “not immune from the global dislocation in financial markets”, but added it was “on track to demonstrate a resilient performance in 2008”.

Analysts had said that HBOS’s outlook would help determine whether its rights issue was a success.

But in an interview with the Reuters news agency, chief executive Andy Hornby said it would go ahead even if shares fell back below issue price.

“We’re underwritten and this rights issue is going ahead. It’s as simple as that. We are not for turning,” he said.

Earlier this month, the Royal Bank of Scotland announced a strong take-up for its £12bn rights issue.

Source: BBC