Halifax Bank of Scotland has warned that property prices are likely to fall by 9% this year - a near doubling of previous expectations as the bank predicts deepening gloom for the housing market.

The UK's biggest mortgage lender said in an update on trading ahead of its £4 billion cash call to investors that the forecast for the property sector will lead to higher bad debt charges, with mortgage arrears levels already rising.

It added that write-downs amid the credit crunch had risen by £58 million to £1.03 billion since the end of March.

The forecast for house prices marks a steep decline from the bank's previous estimate for "mid-single digit" declines in 2008.

HBOS said its revised prediction reflected the UK's slowing economy, a rise in unemployment and limited scope for interest rate cuts amid soaring inflation.

Arrears levels for borrowers falling behind with repayments have risen to 1.89% of total mortgages from 1.67% at the end of December.

The level for specialist mortgages, such as buy-to-let and self-certification loans, where borrowers self-declare their earnings, has risen from 2.59% to 3.09% in the past five months, said HBOS, although it stressed the figures were in line with its expectations.

Retail profits this year will be cut by bad debts and increased costs of raising funds in the crisis-hit wholesale money markets, according to the group.

But it said higher interest rates being charged on loans and mortgages were helping boost income and margins, while it also saw "record" retail savings deposits last month.

HBOS said: "In a more difficult trading environment, HBOS expects a resilient performance in 2008, which will provide a sound platform for the future."

Trading update was issued as HBOS attempts to mobilise its two million strong army of private investors to support a £4 billion rights issue.

The success of the scheme had been thrown into doubt earlier this month when sharp falls in HBOS shares saw the stock fall below the discounted price being offered to shareholders. Shares have since bounced back above the 275p threshold but have been subject to sharp falls.

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