HBOS, Britain's biggest mortgage lender, yesterday added to the spate of warnings on falling UK house prices as it reduced the number of new home loans it sold in the first half.

The bank, which owns Halifax and the Bank of Scotland, reported a 51 per cent fall in pre-tax profit to £1.4 billion after taking a £1 billion hit on investments affected by the credit crunch.

Without these fair-value impairments, the bank would have reported a 14 per cent fall in pre-tax profit to £2.5billion. But shareholders were cheered by the fact the figures were better than expected, and by the promise of a final cash dividend. Almost all of the £1 billion fair-value adjustment on structured credit products were revealed by the bank in May.

HBOS was the FTSE 100's biggest riser, closing up more than 7 per cent at 290.9p per share, well above the 275p subscription price for the bank's £4 billion rights issue last month.

This was compared with a 3.5 per cent fall in Lloyds TSB's share price yesterday. The bank surprised shareholders on Wednesday with lower than expected profits and yesterday analysts cut their forecasts for the bank. Lloyds TSB had prepared the market for bad news by warning of house price falls this year of between 10 per cent and 15 per cent.

Andy Hornby, the HBOS chief executive, revised his own prediction of a 9 per cent fall in property prices this year. Instead, he said that HBOS expected falls of between 15 and 20 per cent by the end of 2010.

The bank boss also raised the prospect of small asset sales for the first time: “We are prepared to look at very selective disposals of assets or running down of small businesses.”

He described the bank's trading conditions as “exceptionally tough”, with a noticable knock-on effect on the real economy in the six months to June 30. There will be a modest increase in unemployment over the coming 18 months, he said, although joblessness would not reach the catastrophic levels of the early 1990s.

Mr Hornby insisted that he was not concerned that HBOS's borrowers would slip into negative equity, even though 12 per cent of mortgage customers had borrowed more than 90 per cent of the value of their home.

He said that this compared well with the last downturn in the property market. In 1992, 34 per cent of borrowers had loans-to-value of more than 90 per cent. At the same time, interest rates rocketed from 7.5 per cent to 15 per cent in 15 months, while unemployment doubled to more than three million.

HBOS took 7 per cent of net new lending in the first half, compared with 26 per cent at Abbey, which has been 2008's biggest lender so far. HBOS has a 20 per cent share of the total mortgage market, which it plans to maintain but not increase. “We're comfortable with that share,” Mr Hornby said. “Taking one in five mortgages is a comfortable place to be.”

Following its capital raising, HBOS has a core equity Tier 1 ratio - a measure of financial strength - of 6.5 per cent, ahead of Lloyds TSB at 6.2 per cent. Lloyds TSB has not raised cash from shareholders to boost its capital cushion.

The percentage of HBOS's mainstream mortgages in three-month arrears improved to 1.33 per cent, down from 1.42 per cent in the first half of last year. In the bank's corporate division, 1.82 per cent of its loans were loss-making, compared with 1.58 per cent last year.

HBOS said that investments in and loans to housebuilders were underpinned by collateral such as land banks.

— House prices fell at a record rate in July, figures from Nationwide Building Society suggest. The lender said property values fell by 1.7 per cent, pushing the annual drop to 8.1 per cent, the fastest rate of decline since its series began in 1991. The average price of a house is now £169,316, down from £172,415 in June and almost £15,000 less than in July last year.

However, Nationwide said that prices were still £11,000 higher than three years ago. Howard Archer, of Global Insight, said prices would flatten out in the second half of 2010 after falling 30 per cent from their peak. But Jean-Michel Six, of Standard & Poor’s, said that prices would bottom out in May next year after falling 25 per cent from the market peak in August last year.